A Collusive Agreement Between Two Firms Is Likely To Break Down When
Suppose there are two companies in the toaster market with some demand function. Company A will determine the production of Company B, keep it constant and then determine the rest of the market demand for toasters. Company A will then determine its increasingly profitable production for these residual needs, as if it were the entire market, and produce accordingly. Company B will simultaneously perform similar calculations in relation to Company A. Collusion usually involves some kind of agreement to aim for higher prices. The oligopoly is a market structure in which there are few companies that manufacture a product. If there are few companies on the market, they can come together to set a price or level of production for the market to maximize the benefits of the industry. As a result, the price will be higher than the market fair price and production is expected to be lower. In extreme cases, companies that collide can act as a monopoly and reduce their individual production, so that their collective production corresponds to that of a monopoly and allows them to make higher profits. The optimal result for companies is to get into conflict (high price, high price) However, it depends on whether there are incentives to oppose holding at this stage, it becomes reasonable for the partner company in conflict to break with the collusive agreement and produce its most profitable production, given the production of their break-away partner. At this point, the secessionist partner can increase its profits by adapting its production to the most profitable level, given the new level of production of the other company. Both companies will continue to adapt their production until neither company can benefit by further adapting their production.
The resulting balance is, according to Antoine Augustin Cournot (1801-1877), called the Cournot balance and represented in Figure 3, where we assume that the two companies are identical, the balance of each of them. if π is the profit of the individual company, Q the level of industrial production, q the level of production of the individual company (where the two companies are considered identical), P is the price of that production, P (Q) is the function represented in equation 1 that gives the P level associated with each level of Q, and C (q) is a function that gives the total cost of the company at each level of its production. To maximize its profit, each company adapts q until π is at its maximum, and imagine if both companies set identical prices above marginal costs. Each company would receive half the market at a higher than marginal price. However, a slight drop in prices would allow a company to win the entire market. As a result, both companies are tempted to reduce prices as much as possible. However, it would be irrational to praise marginal costs, because the company would lose out. As a result, both companies will lower prices until they reach the marginal cost ceiling.
On this model, a duopoly will result in a result that corresponds exactly to what prevails in full competition.