Economics Perfect Competition Questions Long
Collusion in oligopoly refers to a situation where a small number of firms in an industry come together and engage in cooperative behavior to maximize their joint profits. It involves an agreement among these firms to coordinate their actions, typically by setting prices, output levels, or market shares, in order to avoid intense competition and maintain higher profits.
There are two main types of collusion in oligopoly: explicit collusion and tacit collusion. Explicit collusion occurs when firms openly communicate and reach a formal agreement to coordinate their actions. This can be done through formal contracts, meetings, or even cartels. Cartels are a specific form of explicit collusion where firms in an industry agree to fix prices, limit production, and allocate market shares among themselves.
On the other hand, tacit collusion refers to a situation where firms coordinate their actions without any formal agreement or communication. This can occur through various means such as observing and reacting to each other's behavior, following a dominant firm's lead, or through the use of price leadership. Tacit collusion is often facilitated by factors such as market transparency, stable market conditions, and a small number of firms in the industry.
The main objective of collusion in oligopoly is to reduce uncertainty and increase profits for the participating firms. By coordinating their actions, firms can avoid price wars, limit competition, and maintain higher prices and profits. Collusion also allows firms to collectively exert market power and act as a monopolist, thereby reducing the benefits of competition for consumers.
However, collusion is generally considered illegal in most countries as it restricts competition and harms consumer welfare. Antitrust laws and regulatory authorities exist to prevent and punish collusive behavior. These laws aim to promote fair competition, protect consumer interests, and ensure market efficiency.
In summary, collusion in oligopoly refers to the cooperative behavior of a small number of firms in an industry to maximize their joint profits. It can be explicit or tacit, and involves firms coordinating their actions to avoid intense competition and maintain higher prices and profits. While collusion can benefit participating firms, it is generally illegal and harmful to consumer welfare.