 We will continue our discussion on theory of oligopoly, typically the oligopoly form of market structure and if you remember in the last session we discussed this is the most realistic form of market structure although when it comes to theory and when we talks about the determination of equilibrium price and output it is it is not very certain like in case of perfect competitive market structure or monopoly market structure. So, in the previous session we discussed about the features of oligopoly and one of the significant feature of oligopoly is that when one price one firm decides the price and output generally they keeps in the mind that what will be the rival's action with respect to the change in the their price and output and second is even if they knows that there is interdependence but sometimes they ignore or they just assume the plan attached to be before and they never consider the revised plan into their action whenever they are fixing up this price and output. The different kind of models are there on the basis of that how what is the group behavior of the oligopoly's when they collude work for joint profit generally we call it is a collusive oligopoly and when they compete with each other on the basis of price or on the basis of non-price like other factor then price it is called as non-collusive oligopoly and in the context of non-collusive oligopoly in previous class we discuss about the Karnat models, we discuss about the Stackelberg model and we also discuss about the King-Temankar model. To sum up we can say that Karnat model is one where two main outcome emerge from their one is always the individual firm thinks that they are not the rivals is not going to change their plan with the revised period but practically that does not happen and that leads to a situation where may be one-third of the market is untapped it is not being produced or supplied by any of this firm if it is a case of a doper specifically and secondly the second outcome comes from Karnat model is that when linear demand curve and the cost of production is 0 generally the monopoly output is half of perfect competitive output and deopoly output is two-third of competitive output. Then we discuss about the Stackelberg model and to sum up Stackelberg model we can say that it is a leader follower models one firm gets sophisticated they knows that what is the revised plan of the or what is the reaction function of the other firms how they are going to react it and generally they also consider the reaction when they are considering their own price and output plan and in that process they become the leader and the other firm has to follow it. But in the long run if both the firms try to be leader they get into the price where and in the last firm it becomes a cartel when they feel that price where is not at all profitable. Here to note that oligopoly's they knows that the price where is not going to benefit the benefit the producer or the seller rather it is going to benefit the consumer and that is the reason if you look at they never get into price where and even if they are getting into price where they stop it a point they stabilize at a point beyond which they feel that even they are not covering the normal profit what is associated to the product. When we discuss about the king demand curve and king demand curve talks about two different kind of group behavior of the oligopoly's one when one firm decrease the price other follows it and that is why we get the demand curve as the inelastic demand curve for specific firm. Because when others follow it there is no much change in the quantity demanded and they have to even if there is a change in the price the consumer they feel that the other firms also they have change their price. So, there is no significant increase in the quantity demanded of that particular firm and the second type of group behavior is that when one firm increases the price other hardly follows it and in that case the firm encounter a elastic demand curve. So, taking together this inelastic and elastic demand curve with respect to two situation one increase in the price and second decrease in the price the firm generally get a king demand curve which is king between two different segment of the elastic and inelastic demand curve. Corresponding to the king since there is a king in the demand curve we get two level of marginal revenue curve one with respect to the elastic segment of the demand curve and second with respect to the inelastic segment of the demand curve and since there is a king and we get two kind of MR curve in between there is a gap between two MR curve and generally the marginal cost fast through that segment where there is no MR curve and that is the reason even if there is a increase in the cost still the equilibrium price and output never changes. So, this typical model talks about the price rigidity of the as a part of the group behavior of the oligopoly firm and how generally it affects the how generally it does not affect the equilibrium price and output. So, this is about the price or the non-price competition in case of the non-collusive oligopoly. Today we will discuss about the collusive oligopoly. We will talk about two kind of arrangement one it is a cartel and second it is a price leadership model and in both these cases it is a case of collusive oligopoly model where the firms join together in order to maximize the joint profit. Before getting into the model let understand what does it mean when you talk about collusion. So, collusion when a rival firms or all firms they enter into an agreement in mutual interest on various accounts such as price, market share. So, it is a in a simple language to understand collusion we can say it is an agreement where all the firms they come together and they jointly decide about the what is the price to be following the market what should be the market share. Two kind of collusion may happen one is explicit collusion and second one is the tacit collusion. Explicit collusion is one where a number of firms enter into such agreement formally and second is the tacit collusion is collusion which is not ever but still they are into the collusion. And why this tacit collusion comes into picture if you look at there is no legalized version of collusion typically after the cartel if you will find out OPEC as a cartel after that you will find out there is no legal form of cartel exist whatever the form of collusion exist that is in the form of tacit form. So, one where formally they agree into a collusion formally they agree into a group and they work together for the joint profit maximization and output maximization and the other one is the tacit collusion where collusion which is not ever. So, most commonly if you will find form of explicit collusion is generally known as cartel. So, whatever the commonly found explicit collusion is known as cartel and what is the aim of this kind of cartel the aim of such collusion is to reduce competition and increase profit of the individual member. So, obviously, when they collude together work together for the profit maximization that reduces the competition and increase the profit of the individual member. So, basically the individual firms those were not able to get profit those were not able to maximize profit. They were now in a position to maximize the profit because the firms work for the joint profit maximization they fix up a price which gives at least some amount of profit to each of this firm. Government do not encourage collusion because it creates like monopoly and kills competition and when if there is no competition that reduces the generation of employment and income and reduces the also the innovation. So, explicit form of collusion is generally known as cartel and what is the outcome of cartel if you look at the outcome of the cartel in the positive segment is it reduces the competition and the individual firm generally they get some profit out of it earlier who are not able to generate any amount of profit. Generally, government or the authority they never encourage this form of cartel or this form of collusion because ideally when the cartel goes for a long period of time in the long run they act become a monopolist which is not beneficial for the consumer. It reduces the competition it reduces the innovation it reduces the also to some extent the income and employment generation and that is why if you will find authority they always put a restriction on the creation of the collusion or the creation of a cartel. So, cartel as we know it is a direct agreement among the competing oligopolist with the aim of reducing uncertainty. Now, what is the optimization problem for the oligopolist over here the optimization problem for the oligopolist is to reduce the uncertainty. Aim of cartel is to maximize the joint profit and how do they function they appoint a central agency to whom they delegate the authority to decide not only the total quantity that is the output the price, but also the allocation of production among members of the cartel and the distribution of joint profit among them. So, the aim to form the cartel is to reduce uncertainty objective is to maximize joint profit and how do they function they generally appoint a central agency in the consultation with all the firms whom they consider as the central agency and what is the role of central agency the central agency decide what should be the total market output who should produce how much what should be the total what should be the price charge for the product and also when the industry has a whole market is a whole they are getting profit how it has to be distributed among the individual firms. So, the role of central agency is to decide about the price output market share of the different firm and also how the distribution of the joint profit will takes place between the different firms. Now, what is the prerequisite for here to the central agency the prerequisite for here if the central agency is to they have full information about the cost function of the firm and how it help when we talk about the cost function of the firm how it helps because if they knows the cost function accordingly they will allocate that how much amount they have to produce by each of this firm. So, it is assumed that all members and produce the identical product because if they are producing homogeneous product the difficulty again comes here that who should produce which kind of product and since we are assuming here that typically in case of cartel this is assume that all the firms they produce the identical product and the central agency they have the full information about the cost function of the individual firm which one is high cost firm which one is the low cost firm which firm is operating in which stage of the average cost the firm whether they are operating other decreasing portion of the average cost they are operating at the full capacity they are operating at the minimum cost of the average cost or they are operating at the increasing portion of the average cost cost. So, cartel aiming at joint profit maximization it is one in which cartelization is perfect. So, we call about a perfect kind of cartelization per cartel aim at joint profit maximization. It is an arrangement by all members with an objective to maximize the profit and in such type of arrangement the product is essentially homogeneous centralized body decides the pricing of the product. Price is decided by the association or the central agency on the basis of summation of all firms cost and demand function and in this case individual firms they are not the price maker individual firms they are the price taker and what price they take they take the price that is decided on the basis by the central agency on the basis of firms cost and demand function. However, when there are large number of firms and size of market is small it is difficult to sustain cartel and there is a every possibility that some firms may deviate the cartel price and thus cheat among other members. So, when the market size is small and there are large number when it comes to the allocation of the production generally it comes very insignificant and in this case generally the firms they get motivated to charge a different price and cheat other firms and in that way generally the cartel never sustain for a longer period of time because still the time that agreement is there the trust is among the firm is there that everyone has to everyone is just following the central agency guideline regarding output and the price till that time cartel will sustain otherwise cartel will not sustain. So, we will see that graphically when we talk about the summation of the cost and revenue decides the price or they identify the price or they find the price on the summation of cost function and the revenue function. We will see that how this price is decided how the price is going to followed by both the both the firms or may be the number of firms in the market and what is the allocation how the allocation takes place on that basis and what is the profit. So, we will just have a graphical explanation of this entire cost and output determination or the price and quantity determination in case of a centralized cartel. So, we will just take a case of a geopolitist to make it simple to understand. So, this is the demand curve, this is the marginal revenue curve, this demand curve is the demand curve for the entire firm, marginal revenue curve is the summation of the marginal revenue curve of all the firms. This is the marginal cost function which is summation of marginal cost 1 and marginal cost 2 and how the price is determined in the market. We take the point where marginal cost is equal to the marginal revenue leads to the equilibrium price or equilibrium output. So, this is the Q and this is the P, same P is going to followed by both the firms. So, this is the price that has to be followed by both the firms. So, we can call this is as firm 2 and firm 1. We get the average cost function for firm 1 and we get the average cost function for firm 2. Then we get the marginal cost function for 1, we get the marginal cost function for. Now, corresponding to this we look at this MR how this marginal cost function for the individual firms generally and on that basis we can find out what is the output level. So, output level is Q 2 here, output level is 1 here, this is the price, this is the price. So, price is decided on the basis of marginal revenue and marginal cost and in order to identify the quantity because whatever the price determined that is followed by both the firm. Now, how the output will be allocated? Output will be allocated on the basis of the marginal revenue and marginal cost 1 that will give the output level for firm 2. This will be the output level for firm 1. So, in that following this we get Q 1 is the level of output for firm 1 and Q 2 is the level of output for firm 2 and Q is Q 1 plus Q 2. So, how it happens in case of a profit maximization or a cartel aiming at profit maximization, the price is decided on the basis of the marginal revenue and marginal cost and that price is followed by all the firms in the market. Here specifically we have taken the example of Diopoly to make this understand simple and on the basis of the marginal revenue and marginal cost of the specific firm we are finding out the level of output. Now, what happens when this price is followed and this output is being produced by it? Now, in this case this is the price and corresponding to this level of output what is the cost? The cost is this much because this is the average cost this is the price. So, since corresponding to this level of output average revenue or price is greater than average cost the firm gets this much amount of the profit. Similarly, for this level of output this is the average cost this is the price. So, in this case also price is greater than average cost and that is why the firm is getting profit. So, whether it is a case of high cost firm that is a compared to both the firm if you look at firm 1 is the high cost firm and high cost firm still they are getting some amount of the profit and firm 2 they are low cost firm as compared to firm 1 and they are also getting the profit. So, the basic objective of the cartel gets fulfilled here that even if the cost function of the firms in the cartel there in the different there in the different kind of cost function or there in the different level, but when it comes to the maximization of the joint profit all the firm at least gets some amount of the profit. We will just take a numerical to understand this that how this joint profit maximization happens you are taking a specific demand function and cost function of the firms. So, Q is equal to 160 minus 20 p and C is equal to 10 plus 0.3 Q square. Now, we find out what is the profit maximizing output and what is the total profit. So, we can find out Q is equal to 80 minus 10 p. So, we can get p is equal to 8 minus 0.1 Q total revenue is p Q. So, we get 8 Q minus 0.1 Q square marginal revenue is 8 minus 0.2 Q. So, marginal revenue is nothing but dT r with respect to dQ and marginal cost is dC with respect to dQ. So, that comes to 0.6 Q. Now, to find out the profit maximizing level of output we need to follow the MRMC rule. So, MR has to be equal to MC. So, 8 minus 0.2 Q is equal to 0.6 Q. Simplifying this 0.8 Q will be equal to 8 and Q will be equal to 10. So, p is equal to 8 minus 0.1 Q. So, 8 minus 0.1 10 and that comes to 7 and total revenue is p Q. So, it has to be 70 and profit is total revenue minus total cost. So, 70 minus 10 minus 0.3 Q square. So, this is 70 minus 10 minus 0.3 multiplied by 100. So, that comes to 60 minus 0.3 multiplied by 100. So, that comes to rupees 30. So, this is the profit, this is the price and this is the quantity. So, now what are the problems in case of centralized cartel or any form of the cartel? The basic aim is to maximize the joint profit and that they do by finding out a price on the basis of the marginal revenue and marginal cost assessing the total cost function and total revenue function for all the firms. Now, what may be the problem when they are estimating the summation of the total cost or when they are estimating the summation of the total revenue for all the firms? So, there may be a potential problem that there may be a mistake may arise in the estimation of the market demand. It may also arise in the estimation of marginal cost and whenever there is a existence of high cost firm, sometimes it is set an obstacle toward the joint profit maximization. And if the cost curve of the firm lies wholly above the equilibrium marginal cost, profit maximization requires that high cost firm should close down which is not possible. So, a cartel may not also maximize for fear of government of intervention or fear of entry that is one more potential problem and also sometimes the cartel to maintain good image they may not maximize the profit. So, one is fear of government, second one is to maximize the profit and they feel that it is not going to create a good image for them and that is why they would not maximize the profit. Sometimes they feel that when they are maximizing the profit, when they are getting super normal profit other firms may enter into the market. So, to make this is a entry barrier they generally charge a low price and they do not maximize the profit and also fear of government regulation they generally do not maximize the profit. So, as a whole when the basic objective is to maximize the profit, but there are certain problems or certain inherent problem where the cartel typically the oligopoly if they are not maximizing the profit. Now, we will come to the other type of market that is market sharing cartel. So, in a typical explicit collusion one is cartel where it is a centralized cartel maximizing at the joint profit then we have market sharing cartel and here generally the collusion is to share the market and that is on the basis of the agreement on quota or some other basis on the geographical basis in that case they may charge same price they may charge different price. So, in case of market sharing cartel if you look at this form of collusion is more common in practice because it is more popular the firm agrees to share the market, but keep a considerable degree of freedom concerning the style of their output their selling activity and other decision. So, they share the market, but still they keep some amount of freedom on the basis of their selling activity how they are styling their output or maybe some advertisement strategy they want to keep some freedom about that. So, they share the market, but they are also having some freedom when it comes to market their product whether it is selling whether it is advertising or whether it is the presenting style of their output. So, market sharing cartel is again it is two kind one is non-price competition agreement and second is markets sharing on the basis of the quota. So, in the form typically the first kind where market sharing cartel when there is a non-price competition agreement in this form it is a loose cartel generally the member firms agree on a common price at which each of them can sell any quantity demanded. So, member agree on a common price and there is no restriction that what quantity what they are going to sell in the market. Generally this is known as a loose cartel because we will see why this is considered as a loose cartel bit later after looking at the characteristic of a cartel in case of a non-price competition. The price is set by bargaining low cost firm pressing for a low price high cost firm pressing for a high price. So, the strength of bargaining decide how the price is going to be formulated. So, always the low cost firm they press for a low price and high cost firm they press for a high price. The agreed price must be such as it allows some profit to all the member. So, whatever the price decided by the market at least it should give some amount of profit to both the high cost firm and the low cost firm. So, it has to be agreed commonly by the both the high cost firm and low cost firm so that only they get some amount of profit. The firms generally they agree into the fact that they are not going to sell at a price below the cartel price. Whatever the price decided by the cartel they are not going to sell any price below the cartel price. However, they are free to vary their style their product and their selling activity because they have some amount of freedom over there. So, here the firm they are even if they are in the collusion they are competing on a non-price basis and what is the non-price basis here? Non-price basis is when they are competing with each other on the basis of style of their product their selling activity. Maybe even if they are the same even if it is a same price when the output present way style is different the consumer may get attracted to maybe the firm one or firm two where the in particular case they like the product. By keeping their freedom regarding the quality appearance of the product as well as the advertising and other selling policy each firm hopes that it can attain a higher share of market. So, even if they are charging the same price they always feel that since there is a freedom regarding the quality and appearance of the product their selling activity and also with respect to the advertisement and selling policy they always feel that they can attain a higher share of market. They can attract the consumer through all this non-price factor and they will capture a higher share in the market. So, here if you look at collusion is only on the basis of the price for rest of the activity there is no collusion they can compete with each other on the basis of non-price factors. Then the second case when the sharing of the market is on the agreement of the quotas. So, here it is not non-price competition here the market is share on the basis of the agreement on the quotas. So, sharing of the market on the basis of agreement and quota is agreement on the quantity that each member may sell at a agreed price. So, price is decided there is a cartel price and what is the again what is the collusion here? One is with respect to the price and second is what quantity each member is going to sell. So, here the collusion is with respect to price and also with respect to the market share. So, if the firm have identical cost the monopoly solution will emerge with the market being share equally among the member firm. How this will become a monopolist? If there is a identical cost there are 10 firms in the market, 10 firms comes into collusion and they decide two common thing one what is the price to be followed in the market and second what is the total quantity they are going to sell in the market. So, if the entire market is divided into 10 segments and if they are going to continue that in the for a longer period of time that segment one is by firm one segment two is by firm two segment n is by segment n. So, that segment one become in the segment one firm one become a monopolist because there are no competition for segment one. Segment 10 firm 10 is becomes monopoly because there is no competition competitive firms entering into the segment 10. So, in the long run generally monopoly solution emerge in case of a sharing of market agreement on quotas or agreement on the quantity. However, if the cost are different the quota quota and share of the market will differ and this quota is not uniform or the share of the market is not uniform basically the low cost firm they will get a higher share and the high cost firm they will get a lower share because low cost firm is attaining the cost efficiency they can produce a higher amount of the output at a lower cost. So, they will always bargain for a highest market share and they can get the profit through the more market share rather than the increase or decrease in the price because the price cartel price is remain constant and all the firms they have to follow it. So, in this case when the allocation is done the allocation of quota or the share on the basis of the cost is again unstable. So, if you look at if it is identical cost the share is all right if the allocation is share is gone, but if it is not uniform cost if the cost differential is there generally this share on the basis of cost is again unstable. Because in the time in the different time period the possibility is that the cost function of the firms will change the high cost firm in a long run they may become the low cost firm and if the allocation is on the basis of the cost it may not suit them or they may not like to be the part of the cartel. So, share in the case of cost differential are decided by bargaining and the final quota of each firm depends on the level of its cost as well as on its bargaining scale. So, when it comes to the final share what the market should get or what the firm should get individually that depends upon the bargaining scale. So, one is the cost function second one is that what is the bargaining scale of the firm. If the bargaining scale of the firm is good they get a higher share and if the even if they have a good cost function if the bargaining scale is less generally they get a lowest market share. So, it is there are two factors here to decide the market share. It is not solely on the basis of the cost function also it is on the basis of the bargaining power of the firm. The quotas are again decided on the basis of the past level of sales and their productive capacity. So, productive capacity is decided on the basis of the cost function and the cost function and how cost effectively they are producing and second is what is their past level of sales. They generally look at the trend of the sales what they have done in the previous years because that gives the credibility of the firms to produce and sell in the market. So, the when the market share is decided for the different firm the cost function how productive that firm what is their past level of sales because that gives the credibility of the firm in the previous period and also what is the bargaining scale of the firm. So, on this factor on the on this basis of this factor generally the share of the market is decided. But what is the main problem with this kind of collusion? The main problem with this kind of collusion is that all the firms that face the same cost function therefore, the sustainability of such cartel is very unstable. Because as we are discussing before couple of minutes that the cost function cannot be identical for all the firms because all the firms they have enter into the market in the different time period. So, some of them they are operating in the short run some of them they are operating in the long run. Those who are operating in the long run if you look at they are almost started to operating as the low cost firm because they have achieved the economies of scale through the scale operation. But those who have entered at a later date they will always operate at a high cost firm and also about the productivity of the firm that decides that what type of cost function they are operating. So, when the sharing is on the basis of the cost it remain unstable and this cannot be this cartel cannot be sustained for a longer period of time. Then we will see we will just a graphical explanation of this market sharing cartel and then we will discuss few factor which which talks about that what is the requirement or what generally goes wrong if the cartel is not sustainable for a longer period of time. We are assuming a case of duopolist here for graphical explanation in case of market sharing cartel. This is our marginal revenue for the firm A this is the average revenue of B and correspondingly we also get the marginal revenue of B. So, average revenue A and marginal revenue A is the average revenue and marginal revenue for firm A average revenue B and marginal revenue B is the average revenue and marginal revenue for firm B. Then we will look at the average cost which is common to the common to the both the firm because we assume the identical cost and we will look at the marginal cost function and we will identify two points where marginal cost function is marginal cost function is intersecting the marginal revenue function. So, correspondingly we get two point and also the two level of price. So, we get this is marginal revenue of A we will just change the figure it looks a bit clumsy we will just start it phrase. So, we have average revenue of A we have marginal revenue of A then we have average revenue of B we have marginal revenue of B. We have the average cost which is common to both marginal revenue and common to both firm A and firm B. Then we have marginal cost which is again common to firm A and B. We will now identify two points one where marginal cost is equal to marginal revenue A, second when marginal revenue is marginal revenue is equal to marginal cost is equal to marginal revenue of B correspondingly we get one B here price and we also get one more price that is on the basis of the marginal revenue of A. So, this is price A this is price B. So, if you look at here this is Q B here it is Q A. So, firm A is producing Q A firm B is producing Q B the total output is equal to Q A plus Q B. Now, same cost function, but if you look at firm A is producing more than firm B why it is producing more as compared to B because it is a different cost function if it has a different revenue function as compared to the B. So, cost function is same identical cost function on the basis of their bargaining skill, on the basis of the past level sale, on the basis of their productive capacity they are producing a producing a higher level of output as compared to the lower level of output. Now, this price if you look at price is again to different level. So, this may be the price will come in between that is P A is the price decided by firm A, P B is the price decided by firm B, but neither P A nor P B can be the cartel price the cartel price has to be decided on the basis of bargaining power of both Q A and Q B and the cartel price is such that at least it will get some amount of profit. So, market sharing cartel is one where it is the share is on the basis of the share is on the basis of the productive capacity of the firm, the cost function of the firm and what is the bargaining power of the firm. Then we will take a numerical to understand this market sharing cartel. This is the demand function, we will take a separate cost function here 4 Q A plus Q A square, T C B is 2 Q B plus Q B square total revenue should be equal to P Q. So, this is 2 3 4 minus 5 Q multiplied by Q. So, that comes to 2 3 4 Q minus 5 Q square and marginal revenue is equal to 2 3 4 minus 10 Q. Then we will find out the marginal cost. Marginal cost ideally it should be equal to marginal cost A plus marginal cost B. So, marginal cost A is marginal cost marginal cost A is 4 plus 2 Q A and marginal cost B is 2 plus 2 Q B. So, we have marginal revenue, we have marginal cost 1 and marginal cost 2. We can find out the total marginal cost by taking the summation of marginal cost 1 and marginal cost 2. Then we can equalize with MR to find out the output level, to find out the price and also to find out what is the output level of both the firms. So, if MCA is equal to 4 plus 2 Q A, then Q A can be equal to minus 2 plus half marginal cost of A, Q B is equal to minus 1 plus half MCB and since marginal cost is equal to this 2. So, this is has to be Q plus 3 and equalizing marginal cost equal to the marginal revenue Q plus 3 is equal to the marginal revenue which is equal to the 2 3 4 minus 10 Q what we have calculated earlier. So, we will get Q is equal to 21 and P is equal to 129. So, Q is equal to 21, MR is equal to 24. Then we will find out the marginal cost of A and marginal cost of B equal to MR. So, 4 plus 2 Q A is equal to 24, Q A is equal to 10. Similarly, for marginal revenue marginal cost B will find marginal cost which 2 plus 2 Q B which is equal to 24 and Q B is equal to 21. So, Q A is equal to 10, Q B is equal to 21 and Q is equal to a J whole. This is Q B is equal to Q B is equal to 11 because this is 24 minus 2 is 22. So, 2 Q B is equal to 22, Q B is equal to 11. So, if Q B is equal to 11 and Q A is equal to 10, then Q A plus Q B has to be equal to 21. So, now if you look at Q A is just producing 10 and Q B is just producing 11, but still they are in the same cartel because they are agreed to share their market. So, Q A will go on producing 10, till the time the revised output plan is not there from the cartel and Q B is going on producing 11 units. And how they get 10 units or 11 units? This is again on the basis of their cost function at what cost they are operating? They on the basis of the productive capacity and also on the basis of their past sales, how much they have sold in the last time period and also on the main important is the bargaining power of the firm. So, if you look at the market sharing cartel is one, where there are two types of market sharing cartel. One is non-price competition and second is market share on the basis of the agreement on the quota. So, in the case of non-price competition, they generally compete each other on the basis of non-price because they have the common price is agreed, the cartel price is agreed by all the firms, but they have some freedom with respect to the style of the output, their selling activity, advertisement. So, some activity which is non-price factors there, they have some freedom regarding that. So, generally they will compete on the basis of the non-price factor in case of the non-price competition and whatever the price decided on by the market that has to be same. The second case where there is a market share on the basis of the quota by different firms, the quota is decided on the basis of the cost function, on the basis of the productive capacity of the firm, on the basis of the bargaining power, on the basis of the typically what is their past level they have, what is the past experience in the selling the product. And on that basis when the quota is decided, generally it leads to a monopoly kind of situation in the long run because the same portion is get sold by the or get captured by the similar firm for a longer period of time. And that leads to a monopoly situation in that segment because it is since this is a common agreement that that share is given to typical firm, none of the other firms will enter into the market even if that firm is getting a super non profit or the environment of the market is conducive for the other firms to enter into the market. So, in case of collusive oligopoly we discussed two kind of model one is cartel and second one is the cartel and again in the case of cartel we got two type of cartel, one is centralized cartel and second is the market sharing cartel. Let us discuss that why the cartel is not considered legal and why cartel is particularly if you look at why it never sustained for a longer period of time. There are some factors that generally contribute to the formation and the sustainability of the cartel. The first factor the number of firms in the industry, if there are more number of firms in the industry generally forming a cartel and also the sustainability of the cartel is also questionable because a small group can work together a large group working together is difficult because they operate in the diverse condition when it comes to demand, when it comes to revenue, when it comes to cost, when it comes to their inputs, when it comes to their raw material. So, since there is a diverse condition immerse from the large number of firms in the market when the number of firms more in the market forming the market and even sustainability of the cartel is also difficult. Then second factor responsible for the formation and sustainability of cartel is the nature of the product. If the nature of product is homogeneous generally the cartel goes for a longer time period and but if the nature of product is not homogeneous if it is different from each other in this case generally again forming the cartel is difficult and also sustaining the cartel is also difficult. Cost structure if it is in the same range it is in the uniform range again formation is easy and the cartel will sustain for a longer period of time, but if the cost function are different and they have to accept a price what is decided by the cartel generally the cartel goes into the loose end because the high cost firm they always feel that the difference between the price and cost of production is getting narrow down and they will try to cheat the other firm in the market and they will try to sell their product at a higher price and with some product differentiation and that is why the cartel may end and also it may happen that some low cost firm they if the price is set on the basis of a higher difference between the cost of production and cost of production and the price the generally to try to break the cartel price and sell it at a lower price so that they can get a good amount of market share and which will maximize the profit. Then last factor is the characteristic of sales and characteristic of sales depends on what kind of sales of this product and what is the activity followed and what is the strategy followed that leads to the formation and also how that will decide what is the sustainability of the cartel. Till now if you look at there is one only the legalized form of cartel in the world economy and after that you will find that there is number of tacit collusion, but when it comes to explicit collusion it is not legal may be company they form the they collude they form a cartel, but that is not explicit rather that is tacit, but the one example till now that is valid in case of explicit collusion is the OPEC that is organization of petroleum and petroleum of producing country and this cartel is generally the group of people those who are producing the oil these are the oil producing country they form a cartel. The negotiate on the production quotas typically it is a market sharing cartel and there is an incentive to deviate from quota and produce more in the form of in the form of cartel which found that there is an incentive to deviate and quota and produce more and that leads to the fact that there is over product over production in the market which reduces the price all the OPEC member has to suffer the low price and generally the cartel broke over there. So, initially the cartel which form as a market sharing cartel where all the firms they will negotiate their quota and they will only produce that much amount of the oil, but in the long run what happened that there was incentive to deviate from the quota and produce more and some of the member they followed that and when the member they followed that that lead to over production and over production whenever there is over production that leads to the mismatch between the supply and depend that lead to the drop in the price and as a whole all the OPEC member has to suffer the low price and that is the time the cartel actually broke down OPEC as a famous cartel as OPEC that has broke down and the punishment for over production is one country typically Saudi Arabia temporarily increase the production and cause the price to drop even more even member suffers the lower profit and the original deviator is punished. So, in the at the end may be the punishment is a different part at the end the cartel did not continue the cartel could not sustain because of the group behavior of the firms oligopoly's firm in the cartel they did not trust each other they were trying to deviate from the quota they did the over production which mismatch the demand supply and reduces the price in general as reduce the profit of all the firms in the market. So, we will stop here today and we will discuss the other type of collusive model that is typically the price leadership model which is by the low cost firm high cost firm that is in our next session.