Briefly Outline Some of the Main Models of Oligopoly in Which Firms Compete According to Output

Despite cartels being advantageous to all firms in the market, it is likely that the desire to earn higher profits will tempt firms to cheat their fellow members by expanding their own output. For this to be successful, however, all firms must restrict output. This can be enforced by introducing punishments for firms not abiding by the rules. Firms can suggest that if their partner cheats then they will produce at the Cournot level for ever. Then the cheating firm must consider whether or not it is still advantageous to cheat. The firm which is disciplining the other must work out a potential punishment which deters the cheater. A perfect situation for members is if the government can play the role of adjudicator for the cartel members.
The cartel must also be able to restrict entry into the market if it is to be successful. As explained previously, entry by a lot of new firms, or even one large one can bring the price down by increasing the market output. In deciding on creating a cartel, members must examine whether or not they will be able create barriers to entry or if this is not possible they must work out whether or not new firms could bring the price down.
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