Solution:

perfect collusion under oligopoly:

• Collusion or a cartel is a combination of firms whose objective is to limit the scope of competitive forces within a market. Individual firms of a certain industry surrender to a central association the power to make price and output decisions.

• Thus, the cartel or collusive oligopoly assumes monopoly power that determines the price and output in the same capacity with zeal and jest. Perfect collusion implies cartel agreements which is an association of the independent firms within the industry.

• A perfect cartel under oligopoly with complete control over the price and output policy of the member firms and with the threat of entry is a situation for consideration.

(1) Market Sharing Cartel under Oligopoly:

• Another form of perfect collusion under an oligopolistic market is that of a market-sharing cartel by the member firms of a cartel.

• A market sharing cartel is an equal division of total market sales among all its firms. In a differentiated oligopoly, all firms in an industry enter into collusion for charging a uniform price that is agreeable to all the firms.

• They divide the market among themselves according to an agreement and get profits according to their sales and their demand curve will be a part of the demand curve for the industry.

• As each firm has its demand curve with the same elasticity as that of the industry demand curve which can be illustrated in the diagram When equal market sharing DD is the industry demand curve and MR is the corresponding marginal revenue curve (DD1) MC is the aggregate marginal cost curve of the industry.

• MR curve DD1 intersects the MC curve at point E and sets OP price and OQ level of output under this situation. Industry output OQ is shared equally by the firms at MC curve of firms cuts MR curve at point C and OQ level of output is determined as OQ level of output is for the industry as a whole.

• Thus, OQ is just half of the total output QO or OQ0 - Q0Q level of output. Thus, an equal level of output is shared by the firms.

• Each firm tries to increase the share of the market using secret price concessions which tend to change the demand cost conditions further and price variations among firms become more common ultimately the agreement becomes a farce and all the firms act independently as oligopolists.

(2) Perfect collusion:

• A perfect cartel is an extreme form of perfect collusion. Each firm reserves profits according to the assigned quota and therefore the principle of cost maximization is not likely to be followed.

• Thus, it is also contemplated that price and output results obtained under perfect collusive oligopoly are the same as obtained under monopoly.

• The price and output under central can be illustrated with the help of the following diagram

• In the diagram, DD is the industry demand curve and MR is the corresponding marginal revenue curve taking three oligopolistic firms A, B, and C in the industry.

• Their marginal cost curves are MC1, MC2, and MC3 respectively with OP1 level of price with their respective output equal to OQ1m OQ2 and OQ3. MC is the lateral summation of the marginal cost curves of all the individual firms in the industry which equals the Marginal revenue curve at point E with OQ level of output with the price level OP, as DD is the demand curve for the industry and also determines the price for the the industry as a whole under the conditions of perfect collusion and each firm will produce that level of output at which marginal cost curves equal the industry's marginal revenue curves i.e. EP1.

• Thus A will produce OQ1, B will produce OQ2 and C will produce OQ3 of the output, and OQ is the total the output of the industry (OQ1+OQ2+OQ3 = OQ).

• It results in the maximum joint profit for the industry but it is not necessary that each firm may have profit equal to their quota allotment. Mutual agreement and relative bargaining power determine the division of profit.