What are the different types of collusion in oligopoly?

In oligopoly, collusion refers to an agreement or understanding between competing firms to coordinate their actions in order to maximize their joint profits. There are different types of collusion that can occur in an oligopolistic market structure. These include:

1. Explicit Collusion: This type of collusion occurs when firms openly and explicitly agree to coordinate their actions. They may form a cartel, which is a formal agreement among firms to control production levels, set prices, and allocate market shares. Cartels are typically illegal in many countries due to their potential to harm competition and consumers.

2. Tacit Collusion: Tacit collusion refers to a situation where firms coordinate their actions without any formal agreement or communication. This can happen through various means, such as observing and responding to each other's pricing and output decisions. Tacit collusion is often facilitated by market conditions, such as high barriers to entry, limited number of firms, and homogeneous products.

3. Price Leadership: Price leadership occurs when one dominant firm in an oligopoly sets the price, and other firms in the industry follow suit. The price leader typically has a significant market share and is seen as the industry leader. Other firms may adjust their prices accordingly to maintain stability and avoid price wars.

4. Collusive Pricing: Collusive pricing refers to a situation where firms agree to set prices at a certain level to avoid price competition. This can involve price-fixing, where firms agree to charge the same price or maintain a certain price range. Collusive pricing aims to reduce uncertainty and increase profits for all firms involved.

5. Output Quotas: In some cases, firms in an oligopoly may collude to set output quotas, which determine the maximum amount of output each firm can produce. By limiting production, firms can maintain higher prices and avoid excess supply in the market.

It is important to note that collusion is generally considered anti-competitive and illegal in many jurisdictions. It reduces consumer welfare by limiting choices, increasing prices, and stifling innovation. Antitrust laws and regulatory authorities exist to detect and prevent collusion, promoting fair competition and protecting consumer interests.