Imagine that both companies set equal prices above marginal costs. Each company would receive half of the market at a higher price than the marginal cost price. However, by lowering prices slightly, a company could conquer the entire market. As a result, both companies are tempted to lower prices as much as possible. However, it would be irrational to set a price below marginal cost because the company would make a loss. Therefore, both companies will lower prices until they reach the marginal cost limit. According to this model, a duopoly leads to a result that corresponds exactly to what prevails under perfect competition. The result of corporate strategies is a Nash equilibrium – a pair or strategies where neither company can increase its profits by unilaterally changing the price. A true duopoly is a certain type of oligopoly where there are only two manufacturers in a market. There are two main models of duopoly: the Cournot duopoly and the Bertrand duopoly.
A cartel is an agreement between competing companies to work together in order to make higher profits. Cartels usually occur in an oligopolistic industry where the number of sellers is small and the products traded are homogeneous. The members of the cartel can agree on these issues: price fixing, total industry production, market share, distribution of customers, allocation of territories, tendering agreements, creation of joint sales agencies and profit sharing. The problem with law enforcement is finding hard evidence of collusion. Cartels are formal agreements. Because collusion between cartels provides evidence of collusion, it is rare in the United States. Instead, most collusions are tacit, with companies implicitly understanding that competition is bad for profits. An oligopoly is a situation in which a few companies sell most or all of the goods in a market.
Oligopolists earn their highest profits when they can unite as a cartel and act as a monopolist by reducing production and raising price. Since each member of the oligopoly can individually benefit from an expansion of production, such collusion often collapses – especially since explicit collusion is illegal. .