Question

QUESTION 3

Faced with a choice between competition and collusion, firms under oligopoly can behave very differently in oligopolies. Just how they behave is often of interest to the competition authorities, which are on the look-out for anti-competitive practices.

1. In what forms of tacit collusion are supermarkets likely to engage?   
2. Explain why manufacturers of food products continue to supply supermarkets, despite concerns that they are not always treated fairly.
3. Provide THREE (3) justifications why the behavior of oligapolistic firms is often of interest to the competition authorities, which are on the look-out for anti-competitive practices.   

Answer 1

1. Supermarkets are of substanial size and the cost of starting up a supermarket acts as a barrier to their entry. In such cases with limited entries the supermarkets engage themselves in tacit collusion.

a] The main powerful firms can tacitly collude and decrease the prices whereby they can drive out a small and relatively new supermarket out of competition.

b]The supermarkets can charge similar prices but still have a non price competition between them.

c] Supermarkets can engage in price tactics by undercutting the other supermarkets. This can result in other supermarkets turning to be monopolies and compete the super market engaging in price tactics. The supermarket might be engaging in price tactics due to the overall low cost per unit.

2. Manufacturers of food products continue to supply their material to supermarkets even being treated unfairly by them. This is mainly because, by supplying their products to the supermarkets they can ensure a better price when compared to selling it to others. If they are promised by the supermarkets on the purchase of their products in the future, these suppliers can invest for a longer period and this will also help them in cutting the production cost. Because the suppliers are assured of a buyer from the supermarkets, they tend to supply their products to them ignoring the unfair practices practised by them.

3. Oligopolistic firms come under the regulations of government authorities for a look out for anti competitive practices because:

a] In many cases they oligopolistic firms engage in hoarding practises and act as a monopoly by entering into tacit collusions and thereby charge higher prices from consumers.

b] Oligopolistic firms can engage in unfair practices whereby they restrict the entry of new firms by reducing the prices to below profit levels for the new firms. Already established firms can undertake such practices because they have lower production cost.

c] In most of the cases, these oligopolistic firms engage in non price wars which can affect the consumers and suppliers , hence anti competition regulations have to be put in place.