Describe the characteristics of oligopoly. How are the price and the output determined under cartel?

Oligopoly is a market structure with a few sellers offering homogeneous or differentiated products, whose defining feature is interdependence, and when such firms form a cartel they coordinate price and output through a central agency to maximise their joint profit like a monopolist.

The characteristics of oligopoly:

1. Few sellers: there are so few firms that each has a large market share and can influence the price and the strategy of its rivals.
2. Interdependence of decision-making: the key feature — each firm's pricing, advertising and product decisions provoke reactions and counter-reactions from rivals, so every firm must think strategically.
3. Importance of advertising and selling costs: because rivals react to one another, firms spend heavily on advertising and marketing to protect or expand their market share.
4. Barriers to entry: huge investment requirements, economies of scale, brand loyalty and price-cutting by established firms keep new entrants out.
5. Indeterminate and sticky price: interdependence makes the demand curve hard to derive, so the price tends to be indeterminate and, once set, stays sticky (stable).

How price and output are determined under a cartel:

6. Meaning of a cartel: a cartel is a direct (often secret) agreement among competing oligopolists to act jointly; under joint profit maximization the members surrender independent decisions to a central agency.
7. Objective: the aim is to maximise the industry's combined (joint) profit rather than each firm's separate profit, behaving like a single monopolist.
8. Functions of the central agency: it decides the total industry output, the common price, each member's share of output, and how the joint profit is divided.
9. Market demand and MR: the agency treats the members' combined demand as the market demand and derives the industry marginal revenue (MR) curve from it.
10. Industry MC: it forms the industry marginal cost (MC) curve as the horizontal summation of the members' individual MC curves.
11. Profit-maximising output: total cartel output is fixed where industry MC = industry MR, with MC cutting MR from below — the monopoly rule applied to the whole group.
12. Price determination: the common price is read off the industry demand (AR) curve vertically above that total output, and every member sells at this single price.
13. Cost-minimising allocation: output is shared so that each firm's MC equals the common industry MR, so low-cost firms are assigned more output and high-cost firms less, which minimises the cartel's total cost.
14. Sharing the profit: the resulting joint profit is distributed among members according to the cartel agreement, not necessarily in proportion to each firm's output.
15. Nature and instability: the arrangement mimics monopoly and is illegal in most countries, and it tends to be unstable because each member is tempted to cheat by secretly selling more or cutting price.

Thus, oligopoly is marked by a few interdependent firms facing barriers to entry and sticky prices, and under a joint profit maximization cartel the central agency sets total output where combined MC equals combined MR, charges the monopoly price off the demand curve, and allocates that output among members by equating each firm's MC to the industry MR.