ANSWER EXERCISE FOR LU 9 (SPECIAL PRICING POLICY)

1. Describe the source of tension between cooperation and self-interest in a market characterized by oligopoly. Use an example of an actual cartel
arrangement to demonstrate why this tension creates instability in cartels.
= Since there is an intrinsic conflict between the motivations of individual firms to behave in their own self-interest and the aim of firms to
maximise profits collectively through collaboration, tensions between cooperation and self-interest occur in an oligopolistic market. An oligopoly is
a market structure in which a few large companies control the majority of the market. These companies frequently have to decide between
competing with one another and working together to maximise profits.
The creation of cartels is a typical method of cooperating in an oligopoly. A cartel is an arrangement of rival businesses to coordinate their efforts,
including determining production schedules or prices, with the goal of maximising industry profits.

2. Describe the output and price effects that influence the profit-maximizing decision faced by a firm in an oligopoly market. How does this differ from
output and price effects in a monopoly market?
= Oligopolistic firms exhibit interdependence, whereby the activities of one firm have a considerable impact on the others. A company may
gain market share if it raises output, but other companies may respond competitively. The impact of price is when oligopolistic businesses
commonly exhibit price rigidity, which is the reluctance to alter prices on a regular basis. Alternatively, non-price considerations like marketing,
product differentiation, or service quality could be the focus of their competition. In monopoly market, there is just one producer in the market.
Due to the downward-sloping demand curve it confronts, the monopolistic business may determine the output level at which marginal cost equals
marginal revenue in order to maximise profit. The price impact is when monopoly market has the authority to determine the product's pricing. It
takes into account the demand for the goods to establish the price that customers are willing to pay. Price discrimination tactics are one tool the
company might use to seize surplus from customers. Thus, we can see that businesses operating in an oligopoly are required to take rivals'
 responses into account when deciding on pricing and output. The profit-maximizing plan is impacted by strategic relationships and the possibility of
reprisals. While a monopoly market has no direct competitors and functions independently. It may set its price more freely without worrying about
how rivals will react. In summary, dependency, price war potential, and strategic interactions all affect the profit-maximizing decisions made in an
oligopoly. A monopoly, on the other hand, has more control over price and output decisions and does not have to take rivals' responses into
account, which simplifies its profit-maximizing plan.

3. Explain how the output effect and the price effect influence the production decision of the individual oligopolist.
= When making strategic decisions, the individual oligopolist concurrently weighs the consequences of pricing and output. By considering
how changes in output would impact its market share, the reactions of competitors, and the final market price, the company seeks to determine
the production level that maximises its profit. The oligopolist must strike a balance between expanding their output to enhance their market share
and preventing strong competition reactions that could result in lower prices and lower earnings. The business must also take its competitors'
anticipated responses into account. To prevent a price war and preserve price stability, the oligopolist may decide to take a more cautious stance if
it expects rivals to match any increase in production. To sum up, an individual oligopolist's production decision is shaped by the combination of the
price and output effects. When making strategic decisions, the company takes into account the interdependence of rivals' moves and the possibility
that both growing market share and rival responses could have an impact on its profit-maximizing plan.

4. Outline the purpose of antitrust laws. What do they accomplish?

= The goal of antitrust laws is to safeguard and encourage competition in the market. It is believed that competition promotes efficiency,
creativity, and economic expansion. Antitrust laws are designed to ensure that firms compete on the basis of the quality of their goods and services
by preventing monopolies and fostering a competitive environment. The purpose of antitrust laws is to stop monopolies from forming and being
abused. Monopolies and oligopolies can raise prices, restrict consumer choice, and hinder competition. The goals of antitrust legislation are to
dismantle current monopolies and stop the unwarranted concentration of market power. By guaranteeing that customers have access to a wide
range of options in the marketplace, antitrust rules seek to safeguard them. More competition usually results in better products, more affordable
costs, and more innovation. Apart from that innovation is stimulated by competition. Therefore, Antitrust laws are designed to stop actions that
could hinder innovation, like market allocations, anticompetitive agreements, and mergers that would significantly reduce competition. Businesses
are encouraged to spend in R&D in order to keep ahead of their competitors in a competitive market. Innovation is stimulated by competition.
Antitrust laws are designed to stop actions that could hinder innovation, like market allocations, anticompetitive agreements, and mergers that
would significantly reduce competition. Businesses are encouraged to spend in R&D in order to keep ahead of their competitors in a competitive
market. The goal of antitrust legislation is to encourage morally and fairly conducted business. Preventing anticompetitive actions that hurt
consumers and competition, such as price-fixing, bid-rigging, market-sharing, and other collusive practices, is part of this. Overall, antitrust laws
support the general health and effectiveness of the economy by achieving these goals.