Question

How does the members of OPEC collude to maximize profit?

I know OPEC is a oligopoly. But really confused how the members collude to maximize profit?

Answer 1

When an oligopoly collude in the market they behave like a monopoly. i.e. they will collectively produce at the point where the MR and the MC are equal and set price higher than what it would be as a perfect competition or oligopoly. In a oligopoly market the price is set at the point where the MC curve passes through the MR curve gap. If a firm increases the price alone it loses. all the firms i.e. nations are depended and cannot increase the price alone. they have inventive to keep it low.

IN case of collusion i.e. when the are behaving like a monopoly, there is only one firm and no competition. It will increase their profit at the cost of consumer surplus