[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

OPEC leaders met in Caracas,Venezuela, in September 2000.
that the long-run gains from “cooperation” (that is, collusion) are worth the temporary
sacrifice. For instance, if a firm cuts its price or expands its output and the
cheating is detected, the other firms in the cartel may match, or even more than
match, the price cuts or capacity expansions. The cheater ends up not only with
lower profits than anticipated but also with lower profits than it would have obtained
had it cooperated.
A variety of facilitating practices can make collusion easier by making punishment
for cheating easier. Some industries maintain cooperative arrangements—
one firm, for instance, may draw on the inventories of another, in the case of an
unanticipated shortfall—from which cheaters are excluded.
Sometimes, policies that seem to be highly competitive actually have exactly the
opposite effect. Consider the “meeting-the-competition clauses” by which some members
of the oligopoly commit themselves to charging no more than any competitor. This
sounds highly competitive. But think about it from the perspective of rival firms.
Assume one firm is selling for $100 an item that costs only $90 to produce, so it is
making a $10 profit. Consider another firm that would like to steal some customers
away. It would be willing to sell the item for $95, undercutting its rival. But then it
reasons that if it cuts its price, it will not gain any customers, since its rival has already
guaranteed to match the lower price. Further, the second firm knows that it will make
less money on each sale to its current customers. Price-cutting simply does not pay.
Thus, a practice that appears highly competitive in fact facilitates collusion.
Circumstances are always changing, necessitating adjustments in outputs and
prices. The cartel must coordinate these changes. The illegality of collusion makes
this coordination particularly difficult, all the more so since the interests of the members
of the cartel may not coincide—some may find their costs lowered more than
others and therefore seek a greater expansion of output than others. Were there to
be perfect collusion, in which industry profits were maximized, some might have to
contract production and others expand it, with profits of some firms actually decreasing
and others increasing. The gainers could, in principle, make payoffs to the losers
276 ∂ CHAPTER 12 MONOPOLY, MONOPOLISTIC COMPETITION, AND OLIGOPOLY