Feasible Agreements and the Relationship in the Oligopoly Market - Essay Example

The issue of cooperation only occurs for few firms. This is due to the high risk that may come together with collusion. In practice, there are companies that join up and form a cartel in the act of replacing competition with cooperation and consequently sharing the returns through profit maximization. The process of forming an agreement includes the determination of reasonable actions and the disagreement points that pose as the limit points in the negotiation processes. The instance also calls for measures that ensure the stability of the agreement through the laying down of the punishments of the various prohibitions. The threat that comprises the punishment of violation of the agreement should be credible and effective. The following piece thus depicts on the background information for the necessity of a viable agreement. The script illustrates the different approaches during the bargaining procedure. The probable outcomes of the agreement are also component of the article. A reference list appears at the completion of the document as authentication of the various propositions therein. Feasible agreements and the relationship in the oligopoly market Viable agreement refers to a scenario whereby two parties set down the rules that are realistic and achievable. The particular regulations consequently guide the mutual activities of the stakeholders. In the attempt of ensuring that every stakeholder respects the contract, there are the details of every action and the consequences for undertaking every action. The procedure of constructing a comprehensive agreement is cumbersome and significant to the players. The example of an oligopoly requires the sensitization of an agreement between the producers who form the oligopoly. An oligopoly emanates from a few producers were forming a cartel. The issue of a cartel is an illegal happening since the act can tamper with forces of a free market economy (Gowrisankaran, 2014, p. 13). The undertaking of the act is thus in seclusion and secrecy. The firms that are form part of the cartel can, therefore, cheat or comply with the agreement since there is no official monitoring of the agreement. The case correspondingly can lead to different outcomes from the agreement. The players can conform or cheat. On the other hand, one firm can either meet of cheat. Study shows that the distinct character of the participants leads to different economic outcomes. Ion case of a compliance of all stakeholders, there is a sharing of the profit. If one firm cheats during the other complies, then the business that complies tends to stand at a loss that is devastating. Concerning the fact, there is a need to employ a punishment strategy that minimizes the chances of cheating in the agreement. In the instance of understanding the process of making a good agreement, there is a need to define the dominant terms. Oligopoly The case of an oligopoly expresses the scenario whereby there is cooperation between firms that are few in the market whilst producing the same commodity. The primary aim of the collusion is to maximize profit whereas eliminating any new competition that may enter the market. The instance, therefore, gives rise to the case of an oligopoly (Pagel, 2012, p. 5). The primary stakeholders in the production of a product agree to cooperate rather than compete with the intention of creating more profit. The case, therefore, gives way for a Pareto Efficient situation if all the members tend to abide by the rules. Pareto Efficiency The term depicts the allocation measures that redistribute resources in a way that an individual or an institution benefits without making the other worse off. The issue is very prevalent in the case of oligopoly. The institutions that form the oligopoly are few and consequently have to share the resources among themselves without penalizing their counterparts in the collusion. In order to achieve Pareto efficiency in an oligopoly, certain rules should be available (Goswami, 2014, p. 365). The rules should also have consequences in case of a failure to fulfill them. The instance provides the evidence of the fulfillment of the oligopoly and acts a sustainability measure. For the possible formation of an oligopoly and the terms of practice, there is a requirement to strike a bargain. The bargain thus constitutes of a bargaining range that the players can articulate. An agreement is possible within the range of the bargain and in the case of any proposal outside the range, no negotiation is possible. The range of bargain is what brings in the issue of the workable arrangements and how players can accomplish the best out of the set. In order to establish an ideal set of achievable reasonable agreements, there are various issues that need consideration. Identification of the possible agreement The primary aspect of an oligopoly is the issue of sales and the containment of uniformity in price. The case correspondingly calls for the need to establish the bargaining zone of the agreement. The fact is possible by establishing the worst price that each player is possible of selling their product and the best price that the commodity is worth. For example, if a company that deals with automobile cannot sell a single car below the price of five thousand dollars, then that becomes the worst price of the product. If another company that has the interest of and a car from the company and bargains for the price of four thousand dollars, then the situation creates an area that enumerates a cynical contract of the commodity (Holle, 2014, p. 18). The only way that a viable agreement can come to being is through the existence of an overlap in the worst price of the product that is up for grabs. On the other hand, an overlap exists only in the case of a positive deal of a commodity. Therefore, in the case of a negative contract, the players in the deal should abandon the deal since it is not feasible. The problem of overcoming a negative area of bargain The best way to overcome the issue of an undesirable deal is through the collective commitment of sharing the common interests with the case of creating typical value. The act is possible through the enlargement of the view of the particular returns that every stakeholder has an interest of attaining. The issue thus brings in the aspect of integrative bargaining through collective negotiations (Dingle, 2010, p. 304). Collective negotiations in turn bring in the fact of a creating an agreement that is far more rewarding through the creation of value. As an illustration of the statement, the instance of buying a car is a useful scenario. The instance whereby the person who wants to gain more while paying at the worst price of the counterpart can have a negotiation that is outside the commodity. The attributes of the negotiation of the new inclusion can be outside the scope of the deal that they are negotiating. The parties can agree to include another product that can cause an upsurge in the utility of the car. The selling price can be at the worst price while ensuring that the other individual or organization does not become worse off in buying the product. For example, the system that in need of the cars at a price of four thousand dollars can provides the investment funds for the other company. The instance can be through the creation of funds as a loan but at a small interest rate than the offer in any auxiliary body. The practice consequently eliminates the effect of a bad bargain. A formal description of a bargain An agreement involving two parties tends to have a point of contention that acts as a limit to the bargain. The expression of the disagreement point or the threat is v= (v1, v2). The denotations v1 and v2 depict the payoff points of both the stakeholders in the bargain. A feasibility point, F, tends to have a closure that forms a subset with the denotation of R2. The set f and the subset R2 are the elements of the agreement that establishes the bargain. The denotation f tends to be convex. The reason is that the specific arrangement of the F set takes the form of a combination that has the attribute of a correlation of other agreements apart from the negotiation that is at hand (Fu, 2010, p. 11). The problem that may arise therein might be nontrivial if the special arrangements in the f set become favorable to the parties that are players in the disagreement. The primary goal of bargaining is to ensure that there is an agreement that is feasible from the negotiation practices. The third party The possibility of an agreement, therefore, is dependent on the involvement of a third party. In the circumstance that there is a binding contract, then any option of a joint action is possible. In addition, the set of feasibility can contain all the payoffs that are achievable. The instance is better than the reaching of a disagreement zone. In the case that there are no binding contracts, the players can withhold from the negotiation practice. In the case, the set of feasibility has the composition of a correlation of various equilibrium points. The reason is that the specific outcomes do not need any stimulation from exogenous factors. The point of disagreement The point illustrates the failure of the negotiation or in the words; it is the product of a breakdown in the negotiations. Therefore, the disagreement point symbolizes a focal point of equilibrium that the negotiating party can play. The solution of the negotiation is, therefore, dependent on the point of difference. In a measure to acquire the maximum benefit from a contract, each stakeholder should select own point of difference in order to stand a chance of having the maximum benefit of the solution of the bargain (Kenneth, 2005, p. 43). The selection of a single point of difference also provides a chance to be in a better bargaining position in the negotiations. The best avenue to employing in setting the action is setting a disagreement point that increases the payoff of personal conflict while consequently harming the payoff of the other stakeholder’s disagreement. Therefore, the act of trade poses as a game whereby the players choose different conflict points and each participant receives a solution in accordance to the point of disagreement. The solutions to bargaining There are different hypotheses that tend to solve the issue of trade. The proposals tend to have different assumptions about the characteristics of the description of the transaction at the completion of the contract. Nash approach to bargaining The proposal was put forward by John Nash as a solution whereby the method could satisfy various axioms. One of the aspects that the approach would solve is the invariance to the exact transformations or the representations to the invariant utility that ensures equality. The .solution also apprehends the issue of Pareto efficiency and achieves Pareto optimality. The approach moreover ensures that the alternatives of the bargain that are irrelevant do not influence the outcome of the agreement. The symmetry of the bargains is also another feature of the format. In the consideration of the elements of the plan, there is a particular function that helps to understand the construct. If there are dual producers in a particular industry, then u and v represents the two players respectively. The individual players through a consequent collusion tend to be attempting maximizing their utility. (u(x) – u(d) * (v(y) – v(d) is a representation of the maximization process whereby u(d) as well as v(d) represent the prevailing utilities of both the players. In other words, the denotations represent the status quo of the players in case there is no bargain. The product of the two denotations is what makes up the Nash product. The solution as per Nash tends to yield the payoff for the prevailing scenario. In addition, the function represents the equal share of the returns that would accrue in case the deal is satisfactory (Wen, 2006, p. 65). The aspect provides that those companies that operate on the downstream should make proposals in the odd times. On the other hand, the companies in the upstream should make offers in even periods. After the making of the offers, the firms can be decisive on whether to accept or disagree with the proposal. The firms can also resist some subsets that make up the offers instead of rejecting the whole offer. The consideration that comes into place is when the length of the offers tends to reach the zero mark. There is also the assumption that the agreement that results after a contract tends to create a surplus for all the stakeholders who strike the deal. There is also the assumption that the contribution that each player brings is at a constant decrease although the decrease is a week one. Therefore, the outcome of every bargain tends to be unique. Rules to the bargain The rules demarcate the extent to which the collusion can play with reference to the deal. The rule also enumerates the various activities that the stakeholders can undertake and the various effects that the actions can compel them. The oligopolies tend to be doing activities that most probably each stakeholder does not know about. Therefore, the rules can incorporate the instance that any action that the other takes should appear on the table. Performance of the adverse activities can lead to different results. If a player tends to commit an act and confess, then the consequence is minimal than the player who performs the action against the agreement in secrecy and is found out without confessing. The results include the weight of each matter individually, and every case should have an independent consideration. The approach to the bargaining comprises of different strategies that the speakers may use in the negotiation. The players may confess about the activities or deny any possible undertakings. The outcomes of the offers that result might be faith, denial of both players and the admission or denial of one of the stakeholders. Stability to an agreement in collusion Balance is important for the existence of an oligopoly and the efficient operations of the business in accordance to an agreement. The act of weakness is thus a threat to the operations of the players in an oligopoly. The uncertainty finds its roots from the point of setting the prices. The act of setting the prices for a firm that is a component of an oligopoly is dependent on the effect that the new price has on the other members of the conspiracy. The problem of variability may also arise from the distrust that members may have for each other. The lack of cooperation is also a determinant of the instability that results in the understanding. The only way therefore to deal with variability is through cooperation and the opening up of all activities to all the stakeholders in an oligopoly. The instance ensures that the firms can maximize the returns that they fetch from the typical industry. The act is courtesy of a monopolistic cost of the product that the stakeholders produce. In setting a monopolistic price, the firms should have the need of developing the best way of sharing the profits in an equal or a fair manner (Escrihuela-Villar, 2008, p. 140). The action is possible since the firms in the oligopoly have significant incentives that form a part of the collusion if they work in unity. The best means to ensure stability is to reduce the amount of output and consequently set the prices that will ensure profit maximization. However, the restraint that the companies employ should be in unity. Violation of the act should call for punishment. The issue thus raises the need for establishing a punishment threat that is credible and effective. Punishment A sentence reflects an action that acts consequently for the violation of a rule in agreement in a particular act. The effectiveness of the threat of punishment is dependent on the number of individuals who comprise the oligopoly. The stability of the particular collusion that forms an oligopoly decreases with the number of firms that form the collusion. Study makes it clear that if an oligopoly comes to place and an agreement is prevalent, the absence of the discipline measures results to a difference in the production of the commodity. The instance, therefore, implies that one stakeholder tends to benefit more. Therefore, the opportunity of creating a punishment threat depicts the production of the product in the same amounts across all the players. Therefore, the threat is a key determinant of the stability of the agreement. There are various ways or strategies of placing the penalty. The most common threat is the tit-tat measure. The test puts forward that a stakeholder can cooperate because the other member is cooperative especially in the previous business time as per the proposition in the agreement. Correspondingly, an individual member charts in the current period as payback of as a cheat in a recent business end. Another measure that is a punishment threat is the trigger method. The measure depicts the situation whereby both the player is cooperative in case the other partner is also cooperative. In the case of cheating in the activities as per the agreement, the other partner tends to play in accordance of the strategy of the Nash equilibrium. The act in accordance to the equilibrium has no remedy and is forever. The measure is thus a threat to the agreement whereby if one deviates from the rules he forms the basis for the demolition of the agreement. In conclusion, the existence of oligopoly is a means of raising the profits that the individual companies realize. The act is however illegal and thus calls for the need of an agreement that is abiding despite the absence of the law by the government that protects the propositions of every agreement. The situation, therefore, calls that a defaulter may realize. The aspect thus calls for careful bargaining and thorough realization of the various steps to ensure the stability of the agreement. The other important aspect is the issue of a credible punishment mode that is also effective. The prevalence of all the factors that make up a good and stable agreement generates benefits that are far reaching all the stakeholders. The instance is also beneficial to the consumers since they are not victims of price discrimination. Bibliography Dingle, M. (2010). Driving a hard bargain. BMJ, 340, 304. Escrihuela-Villar, M. (2008). A note on cartel stability and endogenous sequencing with tacit collusion. J Econ, 96(2),, 137-147. Fu, L. (2010). The Minimal Description of Formal Concept Analysis. 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