Economics Perfect Competition Questions Medium
Collusion in oligopoly refers to an agreement or understanding between competing firms in an industry to coordinate their actions and manipulate market outcomes in their favor. It involves firms working together to reduce competition and increase their collective 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 behavior. This can take the form of price-fixing agreements, production quotas, or market sharing arrangements. Explicit collusion is illegal in most countries as it restricts competition and harms consumer welfare.
On the other hand, tacit collusion occurs when firms indirectly coordinate their actions without explicit communication or formal agreements. This can happen through various means such as observing and responding to each other's pricing strategies, maintaining price stability, or engaging in strategic behavior to avoid aggressive competition. Tacit collusion is difficult to prove and regulate as it relies on implicit understandings and shared market knowledge among firms.
Collusion in oligopoly can have several effects on the market. Firstly, it reduces competition, leading to higher prices and reduced consumer welfare. By coordinating their actions, firms can collectively raise prices above the competitive level, resulting in higher profits for all participants. Secondly, collusion can also lead to reduced innovation and efficiency as firms have less incentive to invest in research and development or improve their production processes. Lastly, collusion can create barriers to entry for potential new firms, making it difficult for them to enter the market and compete with the established players.
To prevent collusion and promote competition in oligopoly, governments often enforce antitrust laws and regulations. These laws aim to detect and punish collusive behavior, ensuring that firms compete fairly and consumers benefit from lower prices and increased choice. Additionally, regulatory authorities may encourage market transparency, monitor pricing behavior, and promote competition advocacy to deter collusion and maintain a competitive market environment.