Quasi-Competitive Model A model of oligopoly pricing in which each firm acts as a price taker even though there may be few firms is a quasi-competitive model. As a price taker, a firm will produce where price equals long-run marginal costs. This equilibrium will resemble the perfectly competitive solution, even with few firms.

P P P MC MC MC DIND D1 D2 Firm 1 Firm 2 Industry Firm 1

Quasi Competitive Model Industry Price C P MC C D MR Q Quantity C per week

Cartel Model Firms collude on price and/or quantities They act as if they are a monopoly They set an industry price where MRi = MCi The cartel model is not efficient Side payments are necessary to equalize profit

Cartel Model Maintaining this cartel solution poses three problems: Cartel formations may be illegal, as it is in the U.S. by Section I of the Sherman Act of 1890. It requires a considerable amount of costly information be available to the cartel. The market demand function. Each firm’s marginal cost function.

Cartel Problems Illegal in the U.S. Side Payments are difficult Incentives to Cheat https://www.youtube.com/watch?v=t9Lo2fgxWHw Relationships between members is complex

Cartel Model A model of pricing in which firms coordinate their decisions to act as a multiplant monopoly is the cartel model. Assuming marginal costs are constant and equal across firms, the cartel output is point M The plan would require a certain output by each firm and how to share the monopoly profits.

Cartel Model MC1 Industry P Firms P MC2 Pi Di MRi Di MRi Qi Q Q1 Q2 Q MCi=SMC1+MC2 MC2 Pi Di MRi Di MRi Qi Q Q1 Q2 Q MRi=SMC1+MC2 Companies unite to maximizes industry profit

Cartel Model Price P M M P A A C P MC C D MR Q Q Q Quantity M A C M A C per week

Formal Model of Price Leadership Model SC P 1 D’ P L P 2 MC MR’ D Quantity per week Q Q Q C L T