If a company lowers its price to $300, it can only sell 11,000 seats. However, if the airline tries to raise prices, other oligopolists will not increase their prices and the company that has increased prices will lose a significant share of sales. For example, if the company increases its price to 550 $US, the turnover drops to 5,000 seats sold. Therefore, if oligopolists still reassess the price declines of other antitrust firms, but no price increases, none of the oligopolists will have a strong incentive to change prices, as the potential benefits are minimal. This strategy can function as a silent form of cooperation in which the cartel manages to maintain production, increase price and share a level of profit monopoly, even without a legally binding agreement. Can the two companies trust each other? Think about the situation of Company A: since oligopolists cannot sign a legally enforceable contract to act as a monopoly, companies can instead closely monitor what other companies produce and calculate. Alternatively, oligopolists can choose to act in such a way that each company under-pressure to stick to its agreed production volume. In any price management model – barometric, collusive, dominant – it is the sellers who earn more, not the consumers. Customers have to pay more for items they were used to getting for less (before sellers conspired to raise prices). Similarly, a natural monopoly is created when the quantity required in a market is large enough to allow a single company to work at least on the average long-term cost curve. In such an environment, the market has room for only one company, as no small business can work at a low cost to compete at a low cost and no larger company has been able to sell what it produces, given the amount demanded in the market.
There are also many potential drawbacks to the emergence of price leadership within a sector. In general, price management is only good for businesses (in terms of profits and services). Price leadership does not bring any material benefit to consumers. Price leadership can also lead to abuses by competing companies that make the decision not to follow the leader`s prices. Instead, they can follow aggressive advertising strategies such as discounts, refund guarantees, free delivery services and staggered payment plans. Members of an oligopoly may also face a prisoner dilemma. If each of the oligopolists participates in the humiliation of production, high monopoly gains are possible. However, each oligopolist must be concerned that other companies, while curbing production, are using the high price by increasing production and making higher profits. Table 4 shows the inmate`s dilemma for a two-year-old oligopoly, known as a duopoly. If companies A and B agree to maintain production, they act together as a monopoly and earn $1,000 each.
However, the dominant strategy of the two companies is to increase production, each making $400 in profits. Small businesses in the market are forced to cope with the price changes initiated by the dominant companies. This practice is most common in areas where entry costs are high and production costs are known. A dominant model of price management is sometimes referred to as a partial monopoly. In this type of model, the price leader could put pressure on prices, which refers to the practice of reducing prices to a level that prevents small competitors from remaining in business.