Question

b. Describe the source of tension between cooperation and self-interest in a market characterized by oligopoly. Use an example of an actual cartel arrangement to demonstrate why this tension creates instability in cartels.

Answer 1

Oligopoly is a market structure in which the number of sellers is less. An action of one directly affects the competitor, therefore firm has moderate to substantial influence over the price. As there are only few sellers, the key feature of oligopoly creates the tension between self-interest and cooperation. It arises because the profits are maximized when oligopolists cooperate on quantity and price by operating as a monopolist. But the individual profits can be gained by the firm who is cheating on their cooperative agreement. This is the cause of inherently instability of cooperative agreements among cartel members. It is evident in the issues that OPEC experiences while enforcing the cooperative agreement on price and production of crude.