Question

Why might price collusion occur in oligopolistic industries? Assess the economic desirability of collusive pricing.

What are the main obstacles to collusion?

Answer 1

Oligopoly is a market in which there are small numbers of firms with significant market share. This is analogous to a monopoly that has a single firm where a range of firms have oligopoly.

Price collusion exists to maximize income in the oligopolistic industries. Industries set prices among themselves in an oligopolistic market in order to reduce profits due to price wars. A price war between oligopolistic firms may be good for customers because they would have cheaper options but for an oligopolistic company it is devastating. That is why they resort to collusion which is price-fixing between themselves.

In an oligopolistic market, there are many barriers to collusion-

1) the companies on an oligopolistic market can have different demand and cost curves. This will lead to a different price-fixing result for different businesses.

2) The number of firms often poses an obstacle to bribery. This is because the higher the number of businesses, the more difficult it will become to get together and reach an agreement.

3) Cheating can become a obstacle when a colluding firm cheats to sell more at a lower price.

4) There are also legal requirements that may become obstacles to bribery. In many countries collusion isn't legal.

In price leadership, a firm is a price leader and decides prices while other firms follow him. This is legal in United states because other firms are not in any agreement to follow the dominant firm. Another reason is it is not likely in price leadership that firms will control quantity of goods sold or divide the market among themeselves. Price fixing will have all this problems from all firms following a given price, controlling quantity and dividing the market among themselves.