An agreement is an agreement between competing companies to obtain higher profits. Agreements generally occur in an oligopolistic industry where the number of sellers is low and the products marketed are homogeneous. Cartel members can agree on price fixing, total industry production, market share, customer distribution, allocation of territories, supply manipulation, creation of common distribution agencies and profit sharing. The Bertrand model describes the interactions between companies that compete for the price. Companies set maximum prices in response to what they expect from a competitor. The model is based on the following assumptions: is a collusive price-fixing agreement between companies in an oligopolistic industry most likely to be broken under which the following conditions? Whether cartel members choose to defraud the cartel depends on the fact that the short-term revenues from the fraud outweigh the long-term losses resulting from the eventual bankruptcy of the cartel. It also depends in part on the difficulty for companies to monitor compliance with the agreement by other companies. If surveillance is difficult, it is likely that a member will get away with fraud for longer; Members would then be more likely to cheat and the agreement would be more unstable. The Cournot model, where companies compete for production, and the Bertrand model, where companies compete for price, describe the dynamics of the duopoly.
Gambling theory suggests that cartels are inherently unstable because the behaviour of cartel members is a prisoner`s dilemma. Any cartel member would be able to make a higher profit, at least in the short term, by breaking the agreement (a larger quantity produced or sold at a lower price) than it would under the agreement. However, if the deal collapses because of resignations, companies will return to competition, profits would go down and things would be worse. Collusion, secret agreement and cooperation between interested parties for fraudulent, deceptive or illegal purposes. Game theory provides a framework for understanding how companies behave in an oligopoly. Cournot duopoly is an economic model that describes an industry structure in which companies compete at the production level. The model is in principle: A) New companies can easily enter the sector Several factors can cause problems within the framework of a collusive agreement between suppliers: as in the prisoner`s dilemma scenario, cooperation in an oligopoly is difficult to maintain, because cooperation is not in the best interests of the various actors. However, the collective bottom line would be improved if companies cooperated and were thus able to maintain low production, high prices and monopolistic profits. In such a scenario, there are a number of plausible reactions and results. If Coca-Cola lowers their prices, Pepsi can follow up to make sure they don`t lose market share.
In this situation, the exodus leads to defeat. In other words, due to the initial price decline due to Coca-Cola (betraying the status quo), both companies are likely to see lower profit margins. On the other hand, despite the Coca-Cola gap, Pepsi managed to maintain the price point by sacrificing market share to Coca-Cola, while maintaining the established price point. Detention dilemma scenarios are difficult strategic choices, as any deviation from established competitive practice may result in a decrease in gains and/or market share. Bertrand Duopoly: The diagram shows the reaction function of a company that competes for the price. If P2 (the price set by company 2) is lower than marginal costs, enterprise 1 in marginal prices (P1-MC).