Th3.4: Collusive Oligopoly Flashcards
When firms engage in collusion, they may agree on…
prices, market share or advertising expenditure
What are the two main types of collusion?
overt and tacit collusion
What is overt collusion?
when firms come to a formal agreement
What is tacit collusion?
means there is no formal agreement
A formal collusive agreement is called a… which is…
is called a cartel, which is a group of firms who enter into agreement to mutually set prices - rules will be laid out in a formal document which may be legally enforced and fines could be charged on firms that break the rules
What are the two ways a cartel could operate?
agree on a price for the goods and then compete freely using non-price competition to maximise their market share
agree to divide up the market according to the present market share of each business
What is the problem with any cartel?
no firm is likely to set their prices/output at the level they would not ideally choose and there is a constant temptation to break the cartel
The more successful the cartel…
the greater the incentive to break it - it is important for firms to be the first to break it and not the firm who is left to deal with the after effects
Since collusion is illegal, some firms…
may be involved in tacit collusion such as price leadership and barometric firm
What is price leadership?
where one firm has advantages due to its size or costs and becomes the dominant firm - other firms will tend to follow this firm because they would be fearful of taking on the firm in any of price war
What is barometric firm price leadership?
where a firm develops a reputation for being good at predicting the next move in the industry and other firms decide to follow their leader
What are other examples?
unwritten rules about keeping advertising low or not trying to take each other’s customers
