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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.
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P P P MC MC MC DIND D1 D2 Firm 1 Firm 2 Industry Firm 1
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Quasi Competitive Model Industry
Price C P MC C D MR Q Quantity C per week
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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
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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.
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Cartel Problems Illegal in the U.S. Side Payments are difficult
Incentives to Cheat Relationships between members is complex
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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.
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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
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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
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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
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