Collusion in Oligopoly
Collusion
Is a very common feature of oligopolistic markets which is brought on by a need to maximise on profits while also preventing price instability and uncertainty in a particular industry.
Price leadership
This is a situation whereby the pricing is controlled by the dominant firm in a collusion within an industry. In ‘silent’ collusion the price leader will set the price to a level where even the smallest of the companies involved in the collusion will be able to earn some good returns. When firms in a certain industry simultaneously push prices in one direction then it will be a while before there are price differences that can influence consumers to change their demands. This usually occurs where firms take measures to ensure that little or no competitive reactions occur. It seems that when there are a few large companies in an industry they will want to eliminate uncertainty and take part in a type of collusive behaviour. Ultimately these companies engage in ‘price fixing cartels’ which are however illegal in the EU, it is difficult to prove the existence of a price fixing cartel.
Explicit price fixing
This is an attempt by suppliers to control supply and fix price at a level that is close to what would occur in a monopoly. Producers need to able to influence the market supply if they are to succeed in colluding on the price. Distribution of the cartel output may be allocated based on an output quota system. While the cartel is maximising on profit in the industry, the individual firms in the cartel are unlikely to be at their profit maximising point. This leads to firms cheating to make extra profit. Firms cheat by expanding output and at the same time selling at a price that is a bit lower than that of the cartel. When one firm cheats, it is in the interest of the other firms to follow suit. If all the firms break the cartel agreement, an oversupply occurs on the market and consequently prices will fall sharply culminating in the breakdown of the cartel.
Is a very common feature of oligopolistic markets which is brought on by a need to maximise on profits while also preventing price instability and uncertainty in a particular industry.
Price leadership
This is a situation whereby the pricing is controlled by the dominant firm in a collusion within an industry. In ‘silent’ collusion the price leader will set the price to a level where even the smallest of the companies involved in the collusion will be able to earn some good returns. When firms in a certain industry simultaneously push prices in one direction then it will be a while before there are price differences that can influence consumers to change their demands. This usually occurs where firms take measures to ensure that little or no competitive reactions occur. It seems that when there are a few large companies in an industry they will want to eliminate uncertainty and take part in a type of collusive behaviour. Ultimately these companies engage in ‘price fixing cartels’ which are however illegal in the EU, it is difficult to prove the existence of a price fixing cartel.
Explicit price fixing
This is an attempt by suppliers to control supply and fix price at a level that is close to what would occur in a monopoly. Producers need to able to influence the market supply if they are to succeed in colluding on the price. Distribution of the cartel output may be allocated based on an output quota system. While the cartel is maximising on profit in the industry, the individual firms in the cartel are unlikely to be at their profit maximising point. This leads to firms cheating to make extra profit. Firms cheat by expanding output and at the same time selling at a price that is a bit lower than that of the cartel. When one firm cheats, it is in the interest of the other firms to follow suit. If all the firms break the cartel agreement, an oversupply occurs on the market and consequently prices will fall sharply culminating in the breakdown of the cartel.