Question

In five hundred words:

Explain the oligopoly problem , collusion strategy , Cartel with Examples and the conditions on how can they earn higher profits.

Answer 1

1 oligopoly problem

For many years now economists have been struggling with the trouble of devising a high-quality concept of fee dedication under oligopoly. During most of this time the problem used to be viewed as a as an alternative exceptional one making use of only to remoted cases, and most interest was directed toward best competition and " monopoly. Professor Chargberlin and Mrs. Robinson did a whole lot to disturb the complacency of those the usage of theses classifications by arguing that most competitive " situations involved some degree of monopoly. It remained for Mr. Kaldor to point outs that oligopoly was, in fact, the most common condition. He suggested that each seller is in shut competition with only a few others: that these others are themselves in competition with a small wide variety of exceptional corporations and that chains of such oligopolistic groups compose the entire market.

This brought the once-separate research of oligopolistic and competitive rate The into a close relationship. And this union has been strengthened with the aid of the think about ration that a firm must shape its policy in the light no longer solely of the policy of its present Competitors , but additionally of these conceivable opponents who might, underneath sure circum-stances, be induced to enter the market. The truth that some of these conceivable com-petitors might also already be in existence as producers of different commodities , specialy these involving similar production techniques, capability that such new entrants may additionally very well come in at a fairly massive size. he threat of attracting such realy troublesome opposition ought to go far to decrease the freedom of motion of companies that would in any other case have terrific influence in the market. The single massive company in an industries of small enter prises, the digital monopolist, and the giant agency in an enterprise with however a very few giant rivals ought to all endure in mind the opportunity of such new entry, until the industry is closed for some extraordinary reason, criminal or technological. The companies in these conditions are regularly said, therefore, to behave now not too in another way from chain oligopolist.

But even though chain oligopoly principle had as a consequence appeared to swallow up an awful lot of the rest of this section of monetary theory, little has been completed to analyse this structure of competion amongst the few with the typical equipment of oligopoly analysis. A phase of the reason for this failure is no doubt due to the very distinctive assumptions on which the typical theory has been built up (usually a very small quantity of competitors, a totally separated market and no new entry among other things These assump tions are quite inappropriate to stipulations of chain oligopoly. I will undertake, in this paper, to make the integral adjustments in the theory, and to use the analysis, thus amended, to exhibit how a determinate rate can occur in stipulations of chain oligopoly.We can also anticipate right here some of the effects of this endeavour.

Examples of oligopoly abound and consist of the auto industry, cable television, and business air travel. Oligopolistic firms are like cats in a bag. They can both scratch each different to portions or cuddle up and get blissful with one another.

If the dominant corporations in an oligopoly can effectively collude to fix prices, then they can be certain of every other's output, which will permit to maximize their earnings by producing that volume of output the place marginal income = marginal cost, just as it would be for a monopoly.

2 collusion strategy

                                                                                          Collusion is a non-competitive, secret, and on occasion illegal agreement between competitors which attempts to disrupt the market's equilibrium. The act of collusion entails humans or corporations which would normally compete in opposition to one another, however who conspire to work together to attain an unfair market advantage. The colluding parties may also jointly pick to have an impact on the market furnish of a precise or agree to a unique pricing stage which will help the partners maximize their income at the detriment of different competitors. It is common among.Collusion can take many varieties throughout distinctive market types. In every scenario, groups collectively reap an unfair advantage. One of the most common approaches of colluding is fee fixing. Price fixing happens when there are a small number of companies, many times referred to as an oligooly, in a precise supply marketplace. This confined variety of companies offer the identical product and structure an agreement to set the price level. Prices can also be forcibly diminished to power out smaller opponents or can also have an inflated degree to assist the interest of the crew at a drawback to the buyer. Overall, charge fixing can eliminate or reduce opposition while additionally main to even greater boundaries for new entrants.

Example ,

a Milk price by supermarkets 2002-03

After a duration of low milk, butter and cheese prices, supermarkets such as Asda and Sainsbury’s colluded with Dairy suppliers, Dairy Crest and Wiseman Dairies to amplify the fee of milk, cheese and different dairy merchandise in supermarkets. After an OFT investigation, supermarkets and suppliers had been fined a whole of £116m.

The OFT located fees set by means of supermarkets went up via three pence per pint of milk, but the earnings acquired through farmers did not go up. Milk collusion at BBC

b Bank loans collusion – RBS and Barclays 2008-2010

In 2010 the OFT found RBS and Barclays responsible of collusion in sharing fee arrangements for loans to professionals, such as lawyers and accountants. Sharing charge statistics is a way to keep away from rate opposition and maintain expenses high. RBS was once fined £28.59m

c Recruitment agencies forum cartel 2004-06

Between 2004 and 2006 six recruitment corporations shaped a cartel known as the “Construction Recruitment Forum” which met to restoration expenditures for imparting labour to intermediaries and construction companies. They also excluded a new association Parc from any dealings. Hays used to be fined £30.4 million for a ‘Serious breach of opposition law.’

d Collusion in the construction industry – collusion on tender price

In bidding for public area building work, building companies would collude in setting artificially excessive prices. Firms would figure out which contracts they wanted, and opponents would bid purposefully high price. This is a practice recognized as “Cover pricing”. Successful businesses would regularly reward opponents with a secret price for avoiding competition.

e Price fixing in air travel – British Airways and Virgin 2004-06

In 2007, British Airways was fined £270m for unlawful price-fixing preparations with Virgin on long haul flights. The two groups met to agree and collude on the more rate of fuel surcharges in response to rising oil prices. Between 2004 and 2006, surcharges on air tickets rose from £5 to £60 per ticket. The £270m first-class compares to an annual income of £611m for BA.

3 cartel

A cartel is defined as a team of companies that receives together to make output and price decisions. The stipulations that supply upward shove to an oligopolistic market are additionally conducive to the formation of a cartel; in particular, cartels have a tendency to arise in markets the place there are few firms and each association has a giant share of the market. In the U.S., cartels are illegal; however, internationally, there are no restrictions on cartel formation. The organization of petroleum‐exporting international locations (OPEC) is perhaps the best‐known example of an worldwide cartel; OPEC individuals meet frequently to decide how a great deal oil every member of the cartel will be allowed to produce.

Each member of a cartel would be in a position to make a greater profit, at least in the short-run, by means of breaking the agreement (producing a larger extent or promoting at a decrease price) than it would make by using abiding by it.