2. Oligopolies: Pricing Strategies
A large share of the world supply of diamonds comes from Russia and South Africa. Suppose that the marginal cost of mining diamonds is constant at $3,000 per diamond, and the demand for diamonds is described by the following schedule:
Price
Quantity
(Dollars)
(Diamonds)
8,0003,0007,0004,0006,0005,0005,0006,0004,0007,0003,0008,0002,0009,0001,00010,000
If there were many suppliers of diamonds, the price would be
per diamond and the quantity sold would be
diamonds.
If there were only one supplier of diamonds, the price would be
per diamond and the quantity sold would be
diamonds.
Suppose Russia and South Africa form a cartel.
In this case, the price would be
per diamond and the total quantity sold would be
diamonds. If the countries split the market evenly, South Africa would produce
diamonds and earn a profit of
.
If South Africa increased its production by 1,000 diamonds while Russia stuck to the cartel agreement, South Africa's profit would to
.
Why are cartel agreements often not successful?
One party has an incentive to cheat to make more profit.
All parties would make more money if everyone increased production.
Different firms experience different costs.