Question

Would an industry where firms can easily and quickly increase capacity be more or less likely to collude relative to an industry where capacity growth takes longer? Explain using ideas about collusion

Answer 1

COLLUSION

When we analyze the market structures and the types of competitions that exists in the market we got a clear idea of what does collusion actually means. The collusion means when the Competing firms makes an illegal or informal secret or hidden agreement among themselves in order to to interrupt and to alter the general equilibrium. Mainly it occurs in the oligopolistic market structure and the important problem is that when such a collusion made in between some of the firms, gradually it will affect the other firms who are out of this scene. So the entire market system will have such an effect and impact of the collusion. Collusion is mainly of three types; one is formal in which the firms or authorities make the legal agreements in which they have certain rules and regulations has to be followed and it is internationally accepted, for example in OPEC , the organization of accepted producing countries. Another is the informal in which firms enter into an illegal agreement to control the price. Price leadership is the another type where it can it as the monopoly, where the price fixation is under by them.

When we face the question that whether the chance for collusion is more in the industries where firms can easily and quickly increase capacity or the industries in which capacity growth takes longer. The industries in which the firms have a higher capital investment and the high advertisement based firms. Hence the the industries in which the firms can easily and quickly increase capacity are more likely to collude compare than the others. Because when the collude they can fix the price upon their interest. They can fix a higher price to Increase their profits and the consumers will be forced to pay the increased amount. Because the perfect alternatives will not be available in such cases. And it is also important to note that at the time of destruction in business it will be helpful for the firms to rescue from the great loss that they are going to face.