Oligopoly 3

Question 1

What are the types of collusion

Answer 1

Horizontal
Vertical
Explicit V tactic collusion

Question 2

Key aims of business collusion in an oligopoly

Answer 2

• maximise joint profits
• lowers the costs of competition
• reduces uncertainty

Question 3

When is collusion illegal

Answer 3

It doesn’t improve production or distribution of goods or promotes technological progress

Question 4

When is collusion legal

Answer 4

Beneficial to consumers
More information
Innovative and inventive behaviour

Question 5

What is an open (formal collusion)

Answer 5

It is spoken, open or traceable

Question 6

When is price fixing (collusion) easier

Answer 6

When:
Industries are weak
Low penalties for collusion
Participating firms have a high % of total sales 
Strong brands

Question 7

What is collusion

Answer 7

Price fixing

Question 8

Why do many cartels eventually break down

Answer 8

Enforcement problems

Question 9

How do cartels experience enforcement problems

Answer 9

They aim to restrict production to maximise totals profits.

Individual sellers then find it profitable to expand production.

Question 10

Free riders in cartels

Answer 10

Firms who aren’t a part of fetters may benefit by selling just under the cartel price

Question 11

What undermines a cartel’s control of the market

Answer 11

The successful entry of non-cartel firms into the industry

Question 12

What are whistle-blowing firms

Answer 12

Firms previously engaged in a cartel that pass on information to the competition authorities - they expose price-fixing

Question 13

What happens when trust breaks down within a cartel

Answer 13

It is highly likely to come under pressure

Question 14

Key reasons why many producer cartels are unstable

Answer 14

• falling market demand in a recession
• over-production by some members
• exposure by competition authorities
• entry of non-cartel firms into industry

Question 15

What does the UK Competition and Markets Authority (CMA) argue

Answer 15

That cartels are damaging to economic efficiency and economic welfare

Question 16

Who argued that cartels are damaging

Answer 16

UK Competition and Markets Authority (CMA)

Question 17

Consequences of UK businesses founded to be engaging in price-fixing cartels and other forms of anti-competitive behaviour

Answer 17

Can be fined up to 10% of their worldwide turnover.

Up to 5 years imprisonment.

Question 18

Costs of collusive behaviour

Answer 18

Damages consumer welfare
Absence of competition hits efficiency
Reinforces the cartel’s monopoly power

Question 19

How does collusive behaviour damage consumer welfare

Answer 19

Higher prices
Loss of allocative efficiency
Hits lower income families

Question 20

How does collusive behaviour result in an absence of competition hits efficiency

Answer 20

X-inefficiencies leads to higher unit costs
Les incentive to innovate
Output quotas penalise firms who want to expand

Question 21

How does collusive behaviour result in reinforcement of the cartel’s monopoly power

Answer 21

It is harder for new businesses to enter the market

Question 22

Potential benefits from collusion

Answer 22

• 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

Question 23

What is price leadership

Answer 23

Where others usually accept price changes established by a dominant firm and which other firms then follow

Question 24

What is the price that a leader often sets within price leadership

Answer 24

Price high enough that the cost-efficient firm in the market may earn some return above the competitive level