COMPETITION, MONOPOUES AND CARTELS

Before considering the price and quantity of water that would result from the duopoly of Jack and Jill, let’s discuss briefly the two market structures we already understand: competition and monopoly. Consider first what would happen if the market for water were perfectly competitive. In a competitive market, the production decisions of each firm drive price equal to marginal cost. In the in market for water, marginal cost is zero. Thus, under competition, the equilibrium price of water would be zero, and the equilibrium quantity would be 120 gallons. The price of water would reflect the cost of producing it, and the efficient quantity of water would be produced and consumed.

Now consider how a monopoly would behave. Table 1 shows that total profit is maximized at a quantity of 60 gallons and a price of $60 a gallon. A profit-maximizing monopolist, therefore, would produce this quantity and charge this price. As is standard for monopolies, price would exceed marginal cost. The result would be inefficient, for the quantity of water produced and consumed would fall short of the socially efficient level of 120 gallons.

What outcome should we expect from our duopolists? One possibility is that Jack and Jill get together and agree on the quantity of water to produce and the price to charge for it Such an agreement among firms over production and price is called collusion, and the group of firms acting in unison is called a cartel. Once a cartel is formed, the market is in effect served by a monopoly, and we can apply our analysis from Chapter 15. That is, if Jack and Jill were to collude, they would  on the monetarily Outcome because that outcome maximizes ‘the total profit that the producers can  from the market., Our
producers would produce a total of 60 gallons,  would be sat a price of $60 a, price exceeds marginal cost, and the outcome is socially inefficient.

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