Question

Answer the following questions in one paragraph

What is the goal of a Cartel? How is price leadership used by firms in the Oligopoly?

Answer 1

Cartel, an alliance of independent companies or individuals to exert some sort of coercive or monopolistic control on a commodity's output or sale. The most popular agreements are for cost or production control or market division. Cartel members retain their separate identities and financial independence when following common policies. We have a common interest in leveraging the role of monopoly which helps maintain the combination. At least as early as the Middle Ages, variations of cartel-like type existed, and some authors claim to have found evidence of cartels even in ancient Greece and Rome.

Price dominance happens when the price of goods or services in its market is set by a pre-eminent corporation (the price leader). Such leverage will leave the competitors of the leading company with little choice but to follow their lead and suit the prices if their market share is to be retained. Price leadership is common in oligopolies, such as the aviation industry, where prices are set by a dominant company and other airlines feel compelled to adjust their prices accordingly.

As a result of an explicit or implicit agreement between a handful of dominant firms to hold their prices in mutual equilibrium, the collusive price-leadership model can emerge in an oligopoly. The smaller firms are pursuing the price change that dominant firms are introducing. This is the most common practice in industries where entry costs are high and production costs are known. Such agreements may be illegal if the public is defrauded by the effort. There is a fine line between real, unlawful collusion and market leadership— especially if price changes are not correlated with improvements in operating costs.