A Formal Agreement Among Firms

When oligopotic companies think about the quantity to be produced and the price to pay, they are tempted to work with other companies to claim that they are a single monopoly. Joint action allows oligopolistic companies to maintain industrial production, demand a higher price and share profits. If companies work together in this way to reduce production and keep prices high, it is called collusion. A group of companies that have entered into a formal agreement to produce monopoly production and sell it at the monopoly price is referred to as an agreement. The problem with the application is to find solid evidence of collusion. Cartels are formal agreements. Because the cartels provide evidence of collusion, they are rare in the United States. Instead, most agreements are implicit, where companies implicitly realize that competition is bad for profits. Perhaps the simplest approach for collusant oligopolists, as you can imagine, would be to sign a contract together, that they keep production low and keep prices high. If a group of U.S. companies signed such a contract, it would be illegal. Some international organizations, such as the member nations of the Organization of the Petroleum Exporting Countries (OPEC), have signed international agreements to act as a monopoly, maintain production and keep prices high, so that all countries can reap high profits on oil exports. However, such agreements are legally unenforceable because they fall within a shadow of international law.

For example, if Nigeria decides to lower prices and sell more oil, Saudi Arabia will not be able to sue Nigeria and force it to stop. The optimal outcome for companies is to conflict (high price, high price) However, it depends on the incentive to collide in the United States and in many other countries, it is illegal for companies to agree, because the agreements are anti-competitive behavior, which constitutes a violation of antitrust law. Both the Department of Justice`s Department of Understanding and the Federal Trade Commission are responsible for preventing cartels in the United States. Lysine, a $600 million-a-year industry, 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. The differentiation of products at the heart of monopolistic competition can also play a role in the creation of the oligopoly. For example, companies may have to reach a certain minimum size before they can spend enough on advertising and marketing to create a recognizable brand. The problem of competition with, say, Coca-Cola or Pepsi, is not that making fizzy drinks is technologically difficult, but that it is a huge task to create a brand name and marketing efforts to assimilate coke or Pepsi. Since oligopolists cannot sign a legally enforceable contract to act as a monopoly, companies can instead closely monitor what other companies produce and calculate.

Alternatively, oligopolists can choose to act in such a way that each company under-pressure to stick to its agreed production volume. In 2015, Apple and Google were investigated over an agreement between the two companies, in which they agreed not to hire employees of the other company.