OPEC is a cartel – a group of manufacturers that tries to limit production to keep prices above the level of competition. The heart of OPEC is the conference, which brings together national delegations, usually at the level of the oil minister. The conference meets twice a year to allocate production quotas, which are caps for the amount of oil each member is allowed to produce. The conference may also meet in a special session if deemed necessary, especially when the pressure on prices becomes acute. A true duopoly is a specific type of oligopoly in which there are only two producers in a market. There are two major duopoly models: Cournot Duopoly and Bertrand Duopol. An agreement is an agreement between competing companies to obtain higher profits. Agreements generally occur in an oligopolistic industry where the number of sellers is low and the products marketed are homogeneous. Cartel members can agree on price fixing, total industry production, market share, customer distribution, allocation of territories, supply manipulation, creation of common distribution agencies and profit sharing. Imagine that both companies set identical prices above marginal costs. Each company would receive half the market at a higher than marginal price.
However, a slight drop in prices would allow a company to win the entire market. As a result, both companies are tempted to reduce prices as much as possible. However, it would be irrational to praise marginal costs, because the company would lose out. As a result, both companies will lower prices until they reach the marginal cost ceiling. On this model, a duopoly will result in a result that corresponds exactly to what prevails in full competition. The result of corporate strategies is a Nash balance – a pair or strategy where neither company can increase profits by unilaterally changing the price. Gambling theory suggests that cartels are inherently unstable because the behaviour of cartel members is a prisoner`s dilemma. Any cartel member would be able to make a higher profit, at least in the short term, by breaking the agreement (a larger quantity produced or sold at a lower price) than it would under the agreement. However, if the deal collapses because of resignations, companies will return to competition, profits would go down and things would be worse.
If the oligopolists pursued their own interests individually, they would then produce a total greater than the monopoly quantity, and would demand a price below the monopoly price, thus making a lesser profit. The promise of greater gains encourages oligopolies to cooperate. However, the oasis of collusion is inherently unstable, as the most efficient companies will be tempted to break ranks by reducing prices in order to increase their market share.