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 quasicompetitive 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 D1 Firm 1 MC DIND D2 Firm 2 Industry Quasi Competitive Model Industry Price P C C MC D MR 0 Q C Quantity 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 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 P Industry MCi=SMC1+MC2 P MC1 Firms MC2 Pi MRi Qi MRi=SMC1+MC2 Companies unite to maximizes industry profit Di MRi Q Q1 Q2 Di Q Cartel Model Price P P P M M A A C C MC D MR 0 Q M Q A Q C Quantity per week Formal Model of Price Leadership Model Price SC P1 D’ P P L 2 MC MR’ 0 Q C Q Q L T D Quantity per week