What Are The Other Firm`s Profits After The Agreement Is Broken

Even if oligopolists realize that they would benefit as a group by acting as a monopoly, each oligopoly faces a private temptation to produce a slightly higher quantity and make slightly higher profits – while continuing to sty as other oligopolists keep their production low and keep prices high. If at least some oligopolists give in to this temptation and start producing more, then the market price will fall. In fact, a small handful of oligopoly companies would end up competing so violently that they all end up generating zero economic profit – as if they were perfect competitors. Lysin, an industry worth $600 million per year, is an amino acid used by farmers as an additive for animal feed to ensure the good growth of pigs and poultry. Lysin`s main U.S. producer is Archer Daniels Midland (ADM), but several other major European and Japanese companies are also in this market. For a time, in the first half of the 1990s, the world`s major lysine producers gathered in the hotel`s thinking rooms and decided exactly how much each company would sell and what it would ask for. However, the Federal Bureau of Investigation (FBI) became aware of the cartel and placed wiretaps during a series of phone calls and meetings. Assuming that the withdrawals of the two companies are known, what is the likely outcome in this case? Perhaps the best known and most effective cartel in the world is OPEC, the Organization of the Petroleum Exporting Countries. In 1973, OPEC members reduced their oil production. As we know that middle Eastern crude oil had few substitutes, the profits of OPEC members exploded.

From 1973 to 1979, the price of oil increased by $70 per barrel, a figure not seen at the time. However, in the mid-1980s, OPEC began to weaken. The discovery of new oil deposits in Alaska and Canada introduced new alternatives to Middle Eastern oil, sending OPEC prices and profits down. At about the same time, OPEC members began cheating in an attempt to increase individual profits. If a company lowers its price to $300, it can only sell 11,000 seats. However, if the airline tries to raise prices, other oligopolists will not increase their prices and the company that has increased prices will lose a significant share of sales.