Oligopoly 3 Flashcards
What are the types of collusion
Horizontal
Vertical
Explicit V tactic collusion
Key aims of business collusion in an oligopoly
- maximise joint profits
- lowers the costs of competition
- reduces uncertainty
When is collusion illegal
It doesn’t improve production or distribution of goods or promotes technological progress
When is collusion legal
Beneficial to consumers
More information
Innovative and inventive behaviour
What is an open (formal collusion)
It is spoken, open or traceable
When is price fixing (collusion) easier
When: Industries are weak Low penalties for collusion Participating firms have a high % of total sales Strong brands
What is collusion
Price fixing
Why do many cartels eventually break down
Enforcement problems
How do cartels experience enforcement problems
They aim to restrict production to maximise totals profits.
Individual sellers then find it profitable to expand production.
Free riders in cartels
Firms who aren’t a part of fetters may benefit by selling just under the cartel price
What undermines a cartel’s control of the market
The successful entry of non-cartel firms into the industry
What are whistle-blowing firms
Firms previously engaged in a cartel that pass on information to the competition authorities - they expose price-fixing
What happens when trust breaks down within a cartel
It is highly likely to come under pressure
Key reasons why many producer cartels are unstable
- falling market demand in a recession
- over-production by some members
- exposure by competition authorities
- entry of non-cartel firms into industry
What does the UK Competition and Markets Authority (CMA) argue
That cartels are damaging to economic efficiency and economic welfare
Who argued that cartels are damaging
UK Competition and Markets Authority (CMA)
Consequences of UK businesses founded to be engaging in price-fixing cartels and other forms of anti-competitive behaviour
Can be fined up to 10% of their worldwide turnover.
Up to 5 years imprisonment.
Costs of collusive behaviour
Damages consumer welfare
Absence of competition hits efficiency
Reinforces the cartel’s monopoly power
How does collusive behaviour damage consumer welfare
Higher prices
Loss of allocative efficiency
Hits lower income families
How does collusive behaviour result in an absence of competition hits efficiency
X-inefficiencies leads to higher unit costs
Les incentive to innovate
Output quotas penalise firms who want to expand
How does collusive behaviour result in reinforcement of the cartel’s monopoly power
It is harder for new businesses to enter the market
Potential benefits from collusion
- general industry standards can bring social benefits e.g. pharmaceutical research
- fairer prices for producer cooperatives in lower and middle income developing countries
- value of profits
What is price leadership
Where others usually accept price changes established by a dominant firm and which other firms then follow
What is the price that a leader often sets within price leadership
Price high enough that the cost-efficient firm in the market may earn some return above the competitive level
