Cournot`s model, where firms compete for production, and Bertrand`s model, where firms compete on price, describe the dynamics of the duopoly. Whether the members of an agreement choose to defraud the agreement depends on whether the short-term returns of the fraud outweigh the long-term losses resulting from the possible collapse of the agreement. It also depends in part on how difficult it is for companies to monitor whether the agreement is being respected by other companies. If monitoring is difficult, a member is likely to get away with fraud for longer; Members would then be more likely to cheat and the cartel would become more unstable. A cartel is a formal agreement between companies with the aim of increasing their profits. Sometimes companies fail to collaborate, even though working together would lead to a better collective outcome. The Prisoner`s Dilemma is a canonical example of a game theory game that shows why two individuals may not cooperate, even if it seems it is in their best interest to do so. Bertrand Duopoly: The diagram shows the reaction function of a company competing for price. If P2 (the price set by enterprise 2) is less than the marginal cost, enterprise 1 is valued at the marginal cost (P1=MC). If enterprise 2 is above MC but below the monopoly prices, enterprise 1 is just below enterprise 2. If enterprise 2 is higher than the monopoly price (PM), enterprise 1 price at the monopoly level (P1 = PM). Like the prisoner`s dilemma, cooperation in an oligopoly is difficult to maintain because cooperation is not in the best interests of individual actors.
However, the collective result would improve if the companies cooperated and were thus able to maintain low production, high prices and monopoly profits. We can see what the agreements look like in Figure 1. If companies opt for an agreement, they choose to produce the monopolistic production Qc and calculate a corresponding price, Pc, which can be read from the market demand curve. Since they produce together, where MR = MC is, they will maximize the profits of the industry, just like a real monopoly. In the United States, as well as in many other countries, it is illegal for collusion companies because collusion is anti-competitive behavior that constitutes a violation of antitrust law. .