Collusion and cartel

The risk of increased competition and the outbreak of price wars pushes firms to collude in order to maintain prices, achieve stability and consistency of action. A cartel is considered a form of such collusion.

Cartel it is a group of independent firms that coordinate their decisions regarding prices and production volumes as if they were a single monopoly.

The cartel is created with the aim of maintaining prices at a high level and providing one hundred participants with excess profits. The weakest link in the cartel's activities is the problem of coordinating decisions between its members.

The following conditions are necessary for the formation of a cartel.

• 1. Entry to the market should be closed to new, non-cartel companies. Otherwise, after the cartel members raise the price, there will be an influx of new firms into the industry, which will be attracted by higher prices. Supply will increase and the price will fall below the monopoly level.
• 2. The managers of all cartel participants must evaluate market demand and determine what total output should correspond to the high price set.
• 3. Establish quotas for each cartel member so that the total volume of production by all cartel members does not exceed the established one.
• 4. Define rules and control over compliance with established quotas.

The most famous example of an international cartel is the Organization of Petroleum Exporting Countries (OPEC). It controls crude oil production volumes and sets quotas for its members in order to control prices and increase profits.

There are other groups of companies that operate like a cartel. For example, a cartel-type agreement can be traced in the practice of international linear shipping. For more than 50 years, the basis of the organization of the liner shipping market has been the sea liner freight conferences, which regularly service steady flows between the world's largest ports on all continents.

The companies that were part of one or another conference agreed on the joint operation of regular shipping lines. They established a unified ship schedule, rules for clients (booking tonnage and settlements), determined prices for transportation and set quotas for cartel participants. Transportation prices were subject to open publication. However, in accordance with EU antitrust legislation, based on European Commission Regulation No. 4056/86, from October 18, 2008, all freight conferences are subject to liquidation. This, however, did not eliminate the collusion of companies that were previously legally part of certain freight conferences. Formally, “independent” companies continue to operate at similar tariff levels and on almost identical conditions, although it is now more difficult for them to negotiate quotas with each other (the division of the market - cargo and customer base).

Most countries around the world have antitrust laws that limit the ability of large companies to control market prices. However, this does not prevent large companies from carrying out price agreements concluded secretly orally. The main thing is to create the appearance of market competition, thereby circumventing antitrust laws. At the same time, participants in secret agreements are forced to make mutual concessions in order to ensure common interests and develop forms of non-price competition (additional services, after-sales service, etc.).

Agreements are also present in the international air transportation market at both the bilateral and multilateral levels. According to bilateral intergovernmental agreements on international air services, state governments “appoint” authorized air carriers who will operate on the main lines connecting the main passenger flows of these countries. These designated carriers enter into “pool agreements”, i.e. stipulate flight schedules, their regularity and price tariff restrictions. For example, during the off-season, having bought a ticket for an Aeroflot flight and heading to Madrid, a passenger, approaching the check-in counter at the airport, suddenly finds out that he will be flying on a joint flight with Iberia Airlines. Although there will be only one plane, for example, an Aeroflot aircraft. And the crew will be Russian. But in "pool agreements," participating airlines will have to share a portion of the profits and losses they earn, and advertise to everyone that passengers are on a pooled flight. In the air transportation market, this market organization is called codeshare (English) code share agreement ).

Multilateral air unions are well known to passengers who fly a lot and frequently on foreign flights. All of them “earn and save miles” because, having received the appropriate card, they participate in the programs of certain international airline alliances. Participants in aviation alliances do not call them a form of cartel agreement, although economically and organizationally they certainly are. The most famous alliances today include: Star Alliance, Sky Team, Oneworld . For example, Aeroflot, participating in the alliance Sky Team , is obliged to use joint flights with its partners, coordinate flight schedules with them, and use the unified reservation system developed by the alliance. Formally, there is no tariff collusion between members of the alliance, but in essence it certainly exists. This is evidenced by bonus programs, when saved miles from one carrier can be used on flights of other carriers included in the alliance. Alliances also help airlines penetrate new markets. For example, the US air market, to which only airlines specified in international agreements between the US and European countries have access, can be entered by other alliance members through the same code-sharing.

As already noted, the cartel acts on the market as a single monopoly. It sets the cartel price and output by equalizing marginal revenue and marginal cost. In Fig. 12.8, A the maximum profit for the cartel as a whole is achieved at a price R and production volume Q. If the cartel did not exist, then all the firms included in it would act autonomously and prices and output would be established at competitive levels. In Fig. 12.8, A this, accordingly, P1 And Q1 .

Rice. 12.8. Price and production volume of the cartel as a whole(A) and its member company(b)

At the same time, for each firm included in the cartel, the cartel price R is perceived as given from the outside. In Fig. 12.8, b The situation is depicted from the perspective of each company. We see that at a cartel price P, the firm's output is limited by volume q. However, it is beneficial for the firm to increase its own production volume, since equality of marginal revenue and marginal costs at price P is achieved at a larger volume, namely q2. Here a contradiction arises between the interests of the company as a participant in the cartel (maximizing the profits of the cartel as a whole and all firms included in it) and the individual interests of the company, which can further increase its profits by violating the cartel agreement of the first. If all firms violate the rules of the cartel, then the price will be set at a competitive level and will be P1 . Therefore, the centrifugal forces within the cartel are economically justified.

As we see, the behavior of firms in oligopoly markets is very contradictory. None of the above oligopoly models can answer all the questions related to the behavior of firms in such markets. However, they can be used to analyze certain aspects of firms' activities in these conditions.

Ed. A.V. Sidorovich

Section I. MICROECONOMICS

Chapter 18. Models of Imperfect Competition

Cartel model

The difficulty of diagnosing the reactions of competitors in oligopolistic markets increases the tendency of firms to coordinate their actions through collusion, forming a cartel.

A cartel is a group of firms united by an agreement to divide the market and carry out concerted actions in relation to supply (limiting output volumes) and prices (fixing) in order to obtain monopoly profits.

Let's imagine an industry of two firms producing the same products at the same short-term and long-term costs and constant returns to scale (Fig. 18.4). If firms interacted on the principles of perfect competition, then the competitive supply would be Qk at a price Pk, and each firm would produce half the volume of market demand without receiving any economic profit. Knowing the demand for their products, firms, having reached an agreement to limit the volume of output Qkr and fix the price at the level of Pkr, could receive an economic profit equal to the monopoly one (shaded figure).

Therefore, to earn monopoly profits, firms must coordinate their activities so that their joint output equals market demand for the set monopoly price.

Despite the obvious benefits for participants, the cartel is an unstable entity. Firstly, there are always factors that not only promote, but also counteract its occurrence. The smaller the number of firms in an industry and the larger their size, the more homogeneous the products and the more stable the demand, the higher the likelihood of cartelization of the industry. On the contrary, with a large number of firms and low industry barriers, high rates of industry growth and the introduction of innovations, it is difficult to achieve coordination between firms and the likelihood of a cartel emerging decreases. Secondly, even if a cartel is formed, the problem of ensuring its stability arises, which is a much more difficult task than its creation. In this regard, the most important problem for preserving the cartel is the problem of monitoring the implementation of the agreement, especially since within the cartel itself there is also a mechanism for its destruction (Fig. 18.5).

In the case of competitive equilibrium, the supply of the industry would be Q k at a price P k , and the firms in the industry would not receive economic profit. Upon reaching a cartel agreement, firms in the industry will have to reduce supply to Q kr and sell their products at the price P kr established by the cartel agreement, which will ensure they receive a monopoly profit at MC = MR kr. But this is only possible if the firms in the industry produce within the quotas q kr determined for cartel participants. The problem, however, is that for an individual firm in a cartel, profit is maximized at P kr = MC and it will tend to increase its output to q. If all members of the cartel do this, then the market volume will increase to Q 1, and the market price will fall to P k and the economic profit of firms in the industry will again become zero, which will mean the destruction of the cartel.

The success of the cartel depends on the ability of its participants to identify and suppress violations of agreements reached. The practical implementation of such a requirement is feasible only if the procedures for monitoring and imposing sanctions on compliance with the agreement do not require large costs, and the sanctions applied to violators exceed the benefits of violating the agreement.

Since the maximum profit in the market of a homogeneous good is ensured by a monopoly price, the duopolist (oligopolists) will receive the greatest profit in the event of organizing a cartel - an explicit or secret conspiracy to limit market supply in order to maintain a monopoly price.

However, the cartel agreement is not a Nash equilibrium, since each cartel member can increase profits by increasing its output as long as the others adhere to the agreement. This, in particular, is illustrated by the data given in table. 6.1 and 6.2. The likelihood of violating a cartel agreement increases as the number of its members increases.

In addition, unlike a monopoly, a cartel must be wary of competitors entering its market for profit opportunities. This danger can be prevented by setting a price at which market demand will be so saturated that it is unprofitable to satisfy the remaining part of it with existing technology. A method for determining such a price, called the “limit price,” was proposed in the second half of the 1950s. independently of each other by several economists. It is clearly presented in Fig. 6.10. The limit price corresponds to the point of intersection with the y-axis of the tangent to the average cost curve and parallel to the demand line. At the price Plim the cartel will be able to sell Q2 units of its products. The tangent to the average cost curve represents the residual demand, since its length and slope coincides with the segment of the demand line below Plim. Because the curve A.C. is located above the residual demand schedule, then the costs of satisfying it will not pay off. Therefore, if the cartel reduces the price of its products from Pm to Plim, it will make a profit (Plim > > AC), without fear of competitors.

Rice. 6.10.

Let's derive a formula for calculating the limit price. Let market demand be given by the function . The costs of manufacturing products for the cartel and its potential competitors are displayed by the function; respectively . The equation of the residual demand line in the form of a tangent to the average cost curve can be written as follows: . It has one common point with the curve A.C. and at this point the angles of inclination to the abscissa axis are the same for both lines. To determine the coordinates of the tangent point, you need to solve a system of two equations:

Having solved it, we find the value of the limit price

Example 6.3

Industry demand is given by the function P= 80 – 0.5Q; There are two profit-maximizing firms I and II in the industry with the following cost functions:. What price will be set in accordance with: 1) the Cournot model; 2) Stackelberg model; 3) an agreement to maximize cartel profits?

1. Let us derive the reaction equation for firm I. Its profit reaches a maximum at .

Therefore, the reaction equation of firm I is as follows:

The profit of firm II is equal to and reaches its maximum at ; therefore, the reaction equation of firm II has the following form: If firms behave as equal competitors, then the equilibrium values ​​of price and supply volumes will be determined from the following system of equations:

In equilibrium, firms' profits will accordingly be

2. Let firm I act as a leader, and firm II as a follower. Then the profit of firm I, taking into account the reaction equation of firm II, will be

It reaches a maximum at. From here

Thus, as a result of the passive behavior of firm II, its profit decreased, and that of firm I increased.

In the case of firm II leadership, its profit is determined by the formula

It reaches a maximum at (100 – 2qn)/3 = 0 => q„ = 50. Then

3. Firms behave neither according to the Cournot model nor according to the Stackelberg model, but agree to set the same price. But what price can they agree to? Due to the homogeneity of the product, each firm justifiably claims half of the market demand:

On their demand curve they will look for the price-output combination that maximizes the firm's profits. For firm I, this combination is defined as follows:

Firm II at the same price will satisfy the second half of market demand and make a profit in the amount of 48 ∙ 32 – 25 – 20 ∙ 32 = 871 den. units For both firms, the result is better than the Cournot or Stackelberg models. But firm II wants a different price-output combination:

Having satisfied the second half of demand at this price, firm I will receive 50 30 -10 – 0.25 ∙ 302 = 1265 den. units profit. The outcome for both firms is again better than the options discussed above, but the firms have different opinions about the best price.

Firms have another behavioral strategy: to consider themselves as a single enterprise. The Pribij of this enterprise is determined by the formula

It reaches a maximum at

However, in order for firm II to agree to limit its supply on the market to 20 units, firm I must compensate it for losses compared to its best possible result: 875 – 575 = 300. If firm I out of 1590 den. units will give, for example, 305 den. units, then firms will not be interested in violating the cartel agreement on a single price P= 60.

Rice. 6.11. Output volumes in Cournot (C), Stackelberg models with leadership of firm I (SI) and II (SII), cartel (TO)

The calculation results for all three options for the behavior of oligopolists are summarized in Table. 6.3.

Table 6.3. Dependence of market conditions on the nature of relationships between duopolists

A graphical solution to the problem is shown in Fig. 6.11.

Bertrand model

J. Bertrand published an article in 1883 in which he criticized the Cournot duopoly model for the fact that in it competitors determine the volume of output, and not the price of the product. This, according to Bertrand, does not correspond to practice: oligopolists offer customers catalogs of their products, which indicate prices, and not estimated sales volumes. In the Bertrand duopoly model, competitors make decisions not about output volume, but about prices. The initial premises of the Bertrand model: firms produce a homogeneous good and have the same costs, industry demand is reflected by a linear function; The production capacity of each company allows it to fully satisfy market demand.

In such conditions, one of the firms gets the entire market when the price of products of this form is lower than the price of the competitor’s products; when the price ratio is reversed, it is forced out of the market. If a product is sold at a single price, then the market is divided equally among competitors. Therefore, each of the firms represents the demand for its products in the form of the following function:

In Bertrand's model, equilibrium in the market will be established only if both firms sell the product at the same price, equal to the marginal cost: since each competitor has the opportunity to capture the entire market by choosing a price in the interval. As a result, in a duopoly (oligopoly) market the same price is set as in a perfectly competitive market.

This conclusion was called "Bertrand's paradox." It seems no less dubious than A. Cournot’s assumption that firms compete with output volumes, and not with prices. Therefore, economists began to find out under what conditions Bertrand's paradox does not arise.

Fr. Edgeworth introduced into Bertrand's model a constraint on the production capacity of each duopolist. It is assumed that together they cannot offer more goods than consumers ask for at a price equal to marginal cost, i.e.

If , then when production capacity is fully loaded, the price will be established on the market P=L Given the limited production capacity, one of the firms, for example firm I, can, in its demand segment, faun , behave like a monopoly, maximizing profits by reducing its supply. As a result, it will lose some of its customers, but will make a profit because... At the same time, firm II will not be able to oust its competitor from the market due to limited production capacity.

The current situation - different prices for a homogeneous good and different profitability of identical firms - will not last long. Nothing prevents firm II from raising its price too. If it sets a price above its marginal cost but below its competitor's price, it will also make a profit. But unlike firm I, firm II will be able to fully utilize its enterprise, since former clients of the competitor will turn to it. Firm I will be forced to enter into a price war, as a result of which, as it may seem, market conditions will return to their original state: . But that's not true. The Bertrand–Edgeworth model has a Nash equilibrium. For it to arise, firm II, in response to firm I’s transition to a monopoly price, should set a price for its products at which both firms will have the same profits.

Example 6.4

Each of the two firms can produce no more than 4 units. goods, the demand for which is specified by the function Q 0 = 10 -R. The costs for both companies are the same: TC 1 = TC, = 2Iji; so they will split the market equally: qP = 5 – 0,5R. With full use of production capacity, the following situation will develop on the market: q, = qn = 4, P = 2, π, = πΠ = 0; it is clearly presented in Fig. 6.12, A. Considering ourselves as a monopoly on residual industry demand – q,D = 10 – 4 – P 1, firm I can choose the combination q, = 2, P 1 = 4 and make a profit l, = 4 – 2- 2 – 2 = 4. Reducing the offer to q, = 2, firm I increased demand for the products of firm II: q^p = 10 – 2 – P 11. Now she can sell 4 units. goods at the price P11 = 4 and get twice as much profit as firm I: l„ = 4 ∙ 4 – 2 ∙ 4 = 8. But in order to avoid a price war, it is better for her to determine her price from the following equality: (P11 – 2) ∙ 4 = (4 – 2) ■ 4 => => P11 = 3. In this case, both firms will receive the same profit at different output volumes and different prices for the same products: K 2 = 4-2-2-2 = 4; l, = 3-4-2-4 = 4 (Fig. 6.12.6).

Rice. 6.12.

Exactly 100 years after the publication of J. Bertrand's article criticizing the Cournot duopoly model, two American economists D. Crepe and J. Scheinkman built a complex model that combines the concepts of Bertrand and Cournot duopoly. In it, at the first stage, the duopolist simultaneously and independently decides on the size of their production capacity (the maximum possible output volume), and at the second stage they compete with prices at given production capacities.

Another variant of the Bertrand model arises if, instead of limiting the production capacity of firms, they have costs that increase as output increases.

Example 6.5

The cost functions of two identical firms and industry demand are given.

In this case, by setting a price corresponding to the conditions of perfect competition P = MS, firms will divide the market equally and make a profit:

To visualize the current market situation from the point of view of firms, let us take into account that when q i = 6, the demand function for each duopolist has the form Their graphs, together with graphs of average and marginal costs, are shown in Fig. 6.13, A.

It may seem that in the presented situation everyone is happy: firms receive profits, and consumers receive products at socially optimal prices P = MC. However, this condition is unstable. If, for example, firm I wants to set a price based on equality, then its profit will increase:

Moreover, by increasing the price by reducing the volume of supply, firm I increased the residual segment of demand for firm II:

Now it follows from the condition

Firm II, which did not change its pricing policy, saw its profit increase more than that of firm I. The current market conditions are clearly shown in Fig. 6.13, b.

Despite the fact that each of the firms prefers the situation presented in Fig. 6.13, b, the situation shown in Fig. 6.12, A, it cannot be said that the market has stabilized. If firm I sells only 4 units. goods, then firm II can further increase its profits by establishing a monopoly price on the residual

Rice. 6.13.

market segment. Marginal revenue Equating it to marginal costs, we find the profit-maximizing combination. Now some buyers will move from firm II to firm I, and the latter will change the quantity supplied and the price. Due to the lack of a Nash equilibrium, the end of the price war is not in sight when firms' marginal costs increase.

Pricing follows the leader (quasi-monopoly)

In Bertrand's model, firms act in the market as equal competitors. But there are situations when one of the firms significantly exceeds all others in production capacity, and this allows it to satisfy a large part of market demand at lower costs than its competitors. Such a company objectively becomes the leader among sellers, and it determines what price will prevail in the market. Each small firm finds itself in the position of a competitor in a perfectly competitive market: its price is exogenously given, and it increases its supply until marginal costs equal the price set by the leader. The leader takes this circumstance into account when deciding on price. Knowing how much product competitors will offer at each price, he can determine the demand he will receive. To do this, the total supply of all small firms must be subtracted from market demand. In relation to the remaining part of market demand, the leader is a monopolist and, in order to maximize profits, sets the price corresponding to the Cournot point.

Graphic determination of price in a quasi-monopoly market is shown in Fig. 6.14. There's a graph on it D represents industry demand, line M.C. a is the sum of the marginal costs of all small firms, i.e. their supply on the market. Demand curve for the leader's products D 1 is obtained as a result of horizontal line subtraction M.C. a from line D. When the price rises to P1, then small firms can satisfy industry demand without a leader. Therefore, the demand curve for the leader's product begins at point P1. At lower prices, the market is divided between the leader and its competitors. At the intersection point of the curves M.R. 1

Rice. 6.14.

And M.C. 1 is the price P 1, which the leader will choose on his demand curve. At this price the leader will offer, and his competitors will offer Q a units of goods. Because by design, industry demand will be fully satisfied. Despite the fact that each of the small firms perceives the price as given from the outside, they all participate in determining it through the formation of the curve. It is easy to see that in a quasi-monopoly market the price is lower and the sales volume is higher than in a pure monopoly market.

Example 6.6

Market demand is reflected by the known cost functions of the leader and its competitors. In an effort to maximize profits, small firms form their supply

We obtain the demand function for the leader’s products by subtracting the aggregate supply function of its competitors from the market demand function:

It corresponds to the marginal revenue function M.R. 1 = 2. From the equality of marginal revenue to marginal costs, the price is determined:

At this price they will buy 39 units. goods, including 25 units. the leader and 14 units. from its competitors.

• Bain J. Barrier to new Competition. Cambridge, 1956; Modigliani F. New Developments on the Oligopoly Front. Journal of Political Economy. 1956. Vol. 66; Sylos-Labini P. Oligopoly and Technical Progress. Cambridge, 1957.
• Bertrand J. Theorie Mathematique de la Richesse Sociale //Journal des Savants. 1883. Vol. 67. R. 499–508.
• Fr. W. Edgeworth (1845–1926) – English economist. Edgeworth F. La teoria riga del monopolio // Giornale degli Economisti, 1897; in English: Edgeworth F. The Pure Theory / F. Edgeworth; ed. by F. Edgeworth // Monopoly in Papers Relating to Political Economy. London: Macmillan, 1925. Vol. I.
• Kreps D., Scheinkman J. Quantity recommitment and Bertran competition yield Courn ot outcomes // Bell Journal of Economics. 1983. Vol. 14. P. 326–337.

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Microeconomics: subject, object, method.
- Demand. Law of demand. Demand curve. Changes in demand.
- Offer. Law of supply. Supply curve. Change of offer.
- Interaction of supply and demand. Market equilibrium.
- State regulation of the market. The influence of taxes, subsidies, fixed prices on market equilibrium.
- Industry balance. Stability and instability of equilibrium. Web-like model.
- Cardinalist (quantitative) theory of marginal utility. Gossen's laws.
- Ordinalist (ordinal) theory of utility. Axioms of consumer behavior. Consumer equilibrium.
- Consumer reaction to changes in income. Engel curve.
- Consumer reaction to price changes. Substitution effect and income effect.
- Substitution effect and income effect according to Slutsky and Hicks.
- Individual and market demand.
- Elasticity: concept, coefficient, types, forms.
- Price elasticity of demand. Elasticity measurement.
- Income elasticity of demand. Income elasticity of demand coefficient.
- Cross price elasticity of demand. Coefficient of cross price elasticity of demand.
- Price elasticity of supply. Supply curve.
- Point and arc elasticity.
- Consumer surplus and producer surplus.
- Consumer preferences and utility.
- Isoquant and isocost. Producer equilibrium. Returns to scale.
- Production function. Total, average and marginal product.
- Production function and technical progress.
- Production costs and their classification.
- Perfect competition. Equilibrium of a competitive firm in the short and long periods.
- Conditions for maximizing profit under perfect competition.
- Monopoly. Monopoly power, damage caused by monopoly.
- Conditions for maximizing profit under monopoly.
- Price discrimination: essence, types.
- Natural monopoly and its regulation.
- Monopolistic competition: determination of volume and prices.
- Oligopoly. Oligopolistic price wars. Oligopoly models.
- Cartel.
- Cournot duopoly model.
- Perfect competition in resource markets.
- Industry and market demand for resources.
- Industry and market supply of resources.
- Economic rent.
- Monopsony.
- Bilateral monopoly.
...
The full table of contents can be found in the appendix.

Acting together and coordinating decisions regarding production volumes and prices as if they were a single monopoly.
The creation of cartels pursues the goal of completely or partially eliminating competition between firms and, on this basis, maximizing profits. The main problem that the cartel faces is the problem of coordinating decisions between member firms and establishing a system of restrictions (quotas) for these firms.
To form a cartel, you need the following:
a) make sure that there is a barrier to entry in the industry to prevent other firms from selling the product after the price increases;
b) organize a meeting of all manufacturers of a given product in order to establish a joint benchmark for the general level of output;
c) establish quotas for each cartel member;
d) establish a procedure for holding approved quotas.
Cartels impose penalties on those who do not comply with the agreement by exceeding their quotas. Cartels face a problem when making decisions about monopoly price and output level. Firms with higher average costs achieve higher cartel prices. There are disagreements regarding the division of territory.
In modern conditions, cartels exist in more flexible and quite diverse forms: patent pools, licensing agreements, consortia for the implementation of scientific developments.
Cartels are classified into four main categories:
a) cartels in order to control sales conditions;
b) cartels for the purpose of fixing prices;
c) cartels for the purpose of dividing activities, territories, sales and consumers;
d) cartels for the purpose of establishing a share in a certain area of ​​​​business.
In the USA and the countries of the European Community, cartels related to price fixing, market division and limiting output volume and production capacity are prohibited by law.
Highlight two main types cartels: a) cartels that pursue the goal of maximizing total, or industry, profits, and b) cartels that aim to distribute and fix market shares.
Cartels with the goal of maximizing overall profits. Let us assume that there are n firms in the industry that are identical in all respects and whose SATC and MC curves are shown in Fig. 33.1. Condition MC = P is satisfied when q c is released
, which is optimal. Market price P
With
, which firms are guided by, is determined by the intersection of the market demand curve DD and the market supply curve S(MC
Σ
), representing the horizontal sum of the ascending sections of individual MS curves (Fig. 33.2).
Industry output, as seen in Fig. 33.2, will be Q
C
= nq c
, and the profit of each company will be an amount equal to the area of ​​rectangle C
WITH
R
WITH
AB (Fig. 33.1).

121
Rice. 33.1. Quasi-competitive firm
Now suppose that all firms have united into a cartel, the optimal output of which will be Q
m
, and the optimal price is P
m
(Fig. 33.2). Since Q
M
Q
C
, each firm included in the cartel will be assigned a production quota q k
(Fig. 33.1).
With an output equal to the established quota, the firm's profit will be equal to the area C
k
P
M
M.F.
(Fig. 33.1). Consequently, its profit, on the one hand, will be reduced by KNAB, and on the other -
will increase by the sum of areas P
C
P
M
MN and C
k
C
c
KF. Since the sum of areas P
C
P
M
MN and
C
k
C
c
KF is larger than KNAB, the company will be interested in joining the cartel.
Rice. 33.2. Cartel
Cartels that regulate market delimitation. When two cartelized firms are identical in level and cost structure, market shares can be distributed equally (q
1
= q
2
= 0.5Q) with a single monopoly price. In the case where firms' costs vary significantly, production quotas and, accordingly, market shares will be different and unstable. Then market shares will be established through the process of bargaining that occurs between oligopolists. And the decision to demarcate the market will depend not only on the level of costs of the firms included in the cartel, but also on their ability to negotiate quotas and market shares.
Another method of market delimitation involves regional differentiation of prices and product quality. A similar method of market segmentation also occurs at the inter-industry level.
The cartel model that regulates market delimitation is a closed oligopoly model. When the profits earned by firms in a cartel are high, it encourages new firms to enter the market, but not to join the cartel. On the contrary, by setting a lower price compared to the cartel price, they will be able to capture a certain share

G. R. Vechkanova, G. S. Vechkanov. "Microeconomics"
122
market. In order to maintain its market share, the cartel will be forced to slightly reduce the price or start a price war against the newcomer.
Cartels arose as a result of the concentration of capitalist production and the centralization of capital at the end of the 19th century. In the first half of the 20th century. Cartels are most widespread in Germany. In Western European countries, national cartels became widespread in the mid-50s and early 60s. XX century
Nitrogen, uranium, oil and other international cartels are being created and operate successfully. Attitudes towards cartels vary from country to country. In some countries they are prohibited by law, in others they are subject to mandatory registration. In many countries, the state legally uses cartels as an instrument of industrial policy.
For example, after the Second World War 1939–1945. The Japanese government encouraged the creation of “Cartel Rationalization” in order to restructure the industry, standardize materials and components, reduce competition between small supplier firms, reduce their level of diversification and transition to a modern technical level. In the 80s XX century In Japan, the creation of cartels in depressed industries (shipbuilding, textile and petrochemical industries) was encouraged in order to limit new capital investments, obtain government guarantees for loans to change specialization, etc. The governments of many developed countries not only do not limit, but, on the contrary, stimulate activities of international cartels. Cartels are used to strengthen the economic positions of the largest firms at the expense of the interests of medium and small competitors.

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Question 34
Cournot duopoly model.
ANSWER
The first attempt to create the theory of oligopoly was made by a French mathematician,
philosopher and economist Antoine Augustin Cournot back in 1838. However, his book, which outlined this theory, went unnoticed by his contemporaries. In 1863, he published a new work, “Principles of the Theory of Wealth,” where he outlined the old provisions of his theory, but without mathematical proof. Only in the 70s. XIX century followers began to develop his ideas.
The Cournot model assumes that there are only two firms in the market and each firm takes its competitor's price and output unchanged and then makes its decision. Each of the two sellers assumes that its competitor will always keep its output stable. The model assumes that sellers do not learn about their mistakes. In fact, these sellers' assumptions about the competitor's reaction are obviously
will change when they learn about their previous mistakes.
The Cournot model is shown in Fig. 34.1.
Rice. 34.1. Cournot duopoly model
Let us assume that duopolist 1 starts production first, and at first turns out to be a monopolist. Its output (Fig. 34.1) is q
1;
which at price P allows him to extract maximum profit, because in this case MR = MC = 0. For a given output volume, the elasticity of market demand is equal to one, and total revenue will reach its maximum.
Then duopolist 2 begins production. In his view, output will shift to the right by Oq
1
and align with the line Aq
1
. He perceives segment AD of the market demand curve DD as the residual demand curve, which corresponds to his marginal revenue curve MR
2
. The output of duopolist 2 will be equal to half of the demand unsatisfied by duopolist 1, i.e. the segment q
1
D", and the value of its output is q
1
q
2
, which will make it possible to get maximum profit. This output will amount to a quarter of the total market demand at zero price,

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In the second step, duopolist 1, assuming that the output of duopolist 2
will remain stable, will decide to cover half of the remaining unsatisfied demand. Based on the fact that duopolist 2 covers a quarter of market demand, the output of duopolist 1 at the second step will be the entire market demand, etc. With each subsequent step, the output of duopolist 1 will decrease, while the output of duopolist 2 will increase. Such a process will end with a balancing of their output, and then the duopoly will reach a state of Cournot equilibrium.
Many economists considered the Cournot model to be naive for the following reasons.
The model assumes that duopolists do not draw any conclusions from the fallacy of their assumptions regarding the reaction of competitors. The model is closed, i.e. the number of firms is limited and does not change in the process of moving towards equilibrium. The model says nothing about the possible duration of this movement. Finally, the assumption of zero transaction costs seems unrealistic.
Equilibrium in the Cournot model can be depicted through response curves showing the profit-maximizing volumes of output that will be produced by one firm, given the output volumes of a competitor.
In Fig. In Figure 34.2, response curve I represents the profit-maximizing output of the first firm as a function of the output of the second. Response curve II represents the profit-maximizing output of the second firm as a function of the output of the first.
Rice. 34.2. Response curves
Response curves can be used to show how equilibrium is established. If you follow the arrows drawn from one curve to another, starting at release q
1
= 12 000, then this will lead to the implementation of the Cournot equilibrium at the point
E, in which each firm produces 8,000 products. At point E, two response curves intersect. This is the Cournot equilibrium.
COURNAUT Antoine Augustin (1801–1877), French economist, mathematician and philosopher, predecessor of the mathematical school of bourgeois political economy. IN
In his work “Studies on the Mathematical Principles of the Theory of Wealth” (1838), he attempted to study economic phenomena using mathematical methods. He was the first to propose the formula D = F(P), where D is demand; P – price, according to which demand is a function of price.

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Question 35
Perfect competition in resource markets.
ANSWER
Markets for production inputs- these are markets in which, as a result of the interaction of supply and demand, prices for labor, capital and natural resources are formed in the form of wages, interest income and rent.
Demand for production resources secondary and is determined by the demand for products produced using these factors of production. It increases or decreases depending on whether the demand for finished products created with the help of these factors increases or decreases.
The market for production resources acts in two main types: a) market for production resources in conditions perfect competition and b) the market for production resources in conditions imperfect competition.
A feature of the market for production resources under conditions of perfect competition is that neither the buyer nor the seller can influence the prices of production resources.
While in markets for production resources in conditions of imperfect competition, either the buyer or the seller can influence the prices of production resources.
There are separate markets for each type and quality of production inputs: market
labor, capital market, natural resource market. In competitive markets for inputs, resource prices depend on supply and demand.
A perfectly competitive market for production inputs is a market in which the following conditions are met:
many competing buyers of resource services compete to acquire resources of a given quality, which are supplied for sale by competing sellers;
each buyer of resource services acquires only a small share of the available supply of resources, i.e. each buyer cannot change the market demand for resources;
each seller of resources sells only a small share of the total supply, thus cannot significantly influence the market supply;
resource sellers can freely enter and exit any market. Resource owners, in response to changes in resource prices, can move their resources from one direction of use to another, from one area to another.
Demand for resources. The main factors of sustainable demand for any resource are: a) the efficiency of the resource in producing the good; b) the market value (or price) of the good produced using this resource. These factors fully apply to production resources.
The main rule of demand for production resources on the part of an individual competitive firm is to take into account marginal profitability and marginal costs. Under the marginal return of a resource refers to the change in income received as a result of the sale of additional products produced by consuming one unit of any resource. Marginal cost of a production resource is the cost of purchasing each additional unit of a resource.

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The basic rule for the use of production resources can be expressed in the following equality: MPP = MPC, i.e. when the marginal profitability of a resource and the marginal cost of a resource are equal. In these cases, it is not possible to increase income by changing resource consumption.
The use of each subsequent unit of a production resource is associated with a change in costs, reflected in marginal costs, and the marginal product in monetary form. A competitive firm aims to use resources in such a way as to achieve the optimal combination of the marginal cost of a resource and the volume of the marginal product of this resource in monetary terms. When the latter is greater than marginal costs, the firm is interested in increasing demand for the production resource. If the increase in resource costs exceeds the increase in the marginal product in monetary form, then the firm will reduce its demand for the resource.
A firm's demand for production resources under conditions of perfect competition is shown by a curve that depicts how the volume of resources needed by the firm changes when prices for them change and other factors influencing demand remain unchanged.
Firm's demand curve for resources under conditions of perfect competition coincides with the marginal profitability curve of the production resource. This is because product prices and marginal revenue are equal. The demand curve for a resource, as well as the demand curve for manufactured products, has a downward slope, which is due to the law of diminishing marginal productivity. The downward slope of the demand curve for production resources always causes it to intersect with the marginal cost curve, and the intersection point indicates the optimal amount of the resource used by the firm
(Fig. 35.1).
Rice. 35.1. Resource demand curve under perfect competition
The degree of downward slope of demand for inputs depends on price
howl of elasticity demand for production resources. The price elasticity of demand for resources is understood as the ratio of the percentage change in resource consumption to the percentage change in its price. The price elasticity of demand for resources is influenced by the following main factors:
price elasticity of demand for a product;
share of resources in general productive costs;
interchangeability resources;
elasticity of supply of other resources.
The basic principle of price elasticity of demand for production resources is: the easier it is to replace any production resource, the more elastic the demand,
presented to him by the company.

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The price elasticity of demand for productive resources causes changes in the volume of demand for them. Changes in the price of a resource, other things being equal, lead to To
movement along the demand curve for resources. In addition to the price of a given resource, the demand for resources is also influenced by other factors that cause shift of the entire demand curve to the resource to the right or left.
Change in demand for a resource, i.e., the shift of the entire demand curve for a resource is determined by the following factors:
demand for the company's products. The higher the demand for products, the greater the demand for resources;
prices and volumes of offered substitute and complementary resources;
technological changes affecting the marginal product of a resource. An improvement in technology increases the marginal product of a given resource, and the marginal revenue curve for the product of that resource will shift upward.
The shift in the demand curve for production resources is shown in Fig. 35.2.
In Fig. 35.2 uses changes in demand for labor services. It shows that if an increase in the demand for labor services occurs due to an increase in the price of the product or due to an increase in the marginal product of labor, then either of these factors will increase the MRP
L
at any given level of labor use and will shift the labor demand curve from D
1
to
D
2
. Conversely, a decrease in the price of products or a decrease in the marginal product of labor will reduce the firm's demand for labor with D
1
to D