# A Formal Agreement Between Firms

For example, game theory may explain why oligopolies struggle to maintain collusive agreements to obtain monopoly profits. While collectively, companies would be better off if they cooperated, each company has a strong incentive to deceive and undervalue its competitors in order to increase its market share. Since the incentive to overflow is strong, companies can`t even make a collusive deal if they don`t think there`s a way to effectively punish defectors. There is no single model describing how an oligopolistic market works. [8] The diversity and complexity of the models is that two to ten companies can compete on the basis of price, quantity, technological innovation, marketing and reputation. However, there are a number of simplified models that attempt to describe market behaviour taking into account certain circumstances. Among the best-known models, some are the company`s dominant model, the Cournot Nash model, the Bertrand model, and the folded demand model. Keeping prices and production at an oligopolistic level is therefore a problem of collective action that can be modeled in the same way as a game of “prisoners` dilemma”. In the prisoners` dilemma, there is a strictly dominant strategy to end cooperation and the agreement is therefore expected to fail. However, agreements may be maintained, just as class action may be maintained in prisoners` dilemmas. If the game is repeated, predicts the popular phrase, cooperative solutions are possible.

If a company sees that all other companies are keeping prices high and limiting production, it can do the same. Cartels are therefore the simplest in markets with fewer companies and where the price of the product is easily measured by all companies. As a result, cartel in new car markets, particularly where companies control the outlets for their cars, is much simpler than in fresh fruit markets. The Cournot Nash model is the simplest oligopolis model. The model assumes that there are two “companies on the same point”; Firms compete on the basis of quantity, not price, and each firm “makes a decision assuming that the behaviour of the other firm is determined”. [9] The market demand curve is estimated to be linear and marginal costs to be constant. To find the Cournot-Nash equilibrium, we determine how each company reacts to a change in the production of the other company. The path to equilibrium is a series of actions and reactions. The pattern continues until none of the companies want to “change what they do, because they think the other company will react to any change.” [10] Equilibrium is the intersection of the reaction functions of the two firms. The reaction function shows how one company reacts to the other company`s choice of quantities.

[11] For example, suppose that the demand function of the enterprise is 1 P = (M − Q2) − Q1, Q2 being the quantity produced by the other company and Q1 being the quantity produced by The Company 1,[12] and M=60. Suppose the marginal costs are CM=12. Company 1 wants to know how to maximize quantity and price. Company 1 begins the process by adhering to the profit maximization rule, which equates marginal revenues and marginal costs. The overall turnover function of enterprise 1 is RT = Q1 P = Q1 (M − Q2 – Q1) = MQ1 − Q1 Q2 – Q12. The marginal income function is R M = ∂ R T ∂ Q 1 = M − Q 2 − 2 Q 1 {displaystyle R_ {M}={frac {partial R_{T} {partial Q_{1}} {partal} }= M-Q_{2}-2Q_{1}}. [Note 1] In the study of the economy and competition in the market, collusion takes place within a sector when competing companies cooperate for their mutual benefit. Cartels often take place in an oligopolistic market structure where there are few companies and where agreements have a considerable impact on the entire market or on the sector as a whole.

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