How did this soap opera end? Following an investigation, the French antitrust authorities fined Colgate-Palmolive, Henkel and Proctor and Gamble for a total of 361 million euros (US$484 million). Ice manufacturers have had a similar fate. Ice bags are a commodity, a perfect substitute that is usually sold in 7 or 22 pound bags. No one cares about the label on the bag. By agreeing to cut out the ice market, control large geographic areas and set prices, ice cream manufacturers have moved from perfect competition to a monopoly model. Under the agreements, each company was the sole supplier of ice bags in an area; Both in the long term and in the short term, there have been benefits. According to the court, these companies conspired illegally to manipulate the market. The fines were about $600,000 — a large fine considering that a bag of ice is sold for less than $3 in most parts of the United States. Many real oligopolies, marked by economic changes, legal and political pressures and the egos of their senior managers, are going through episodes of cooperation and competition. If the oligopolies could maintain cooperation between themselves in terms of production and pricing, they could reap profits as if they were a monopoly. However, each company in an oligopoly is encouraged to produce more and gain a greater share of the global market; When companies start to behave in this way, the market outcome may be similar, in terms of price and quantity, to that of a very competitive market. The prisoner`s dilemma is a scenario in which the benefits of cooperation are greater than the benefits of pursuing one`s own interests.
It`s good for oligopoly. The story behind the prisoner dilemma is that the differentiation of products at the heart of monopolistic competition can also play a role in the creation of the oligopoly. For example, companies may have to reach a certain minimum size before they can spend enough on advertising and marketing to create a recognizable brand. The problem of competition with, say, Coca-Cola or Pepsi, is not that making fizzy drinks is technologically difficult, but that it is a huge task to create a brand name and marketing efforts to assimilate coke or Pepsi. A combination of barriers to entry that create monopolies and product differentiation that characterizes monopoly competition can create the framework for an oligopoly. For example, when a government grants a patent to a company for an invention, it can create a monopoly. For example, if the government grants patents to three different pharmaceutical companies, each with its own drug to reduce hypertension, these three companies can become an oligopoly. Game theory provides a framework for understanding how companies behave in an oligopoly.