Question

How does market concentration impact the probability that cooperative pricing will be sustainable in an industry? Why? Examples

Answer 1

Firstly, the market concentration is a function which is related with the purpose of profit making. Firms will concentrate in a market if the market is attractive and offers better returns to them. For eg. telecom industry of India was earlier concentrated and the companies were offering similar prices for almost same products or products with a little variation. Cooperative pricing occurs because they know that customer has a choice which revolves only around those available options.

Cooperative pricing will be sustainable in such a situation because the firms have similar objectives and they try to make more and more profit out of the market. The biggest example is Indian telecom sector, before the rise of a new firm Jio (Reliance Jio Infocomm Ltd.). Earlier to that the firms were controlling the whole market and were offering data and calls at very high prices even it was possible to provide the same at low prices.

But once Jio came with different objectives it changed and ruled the whole market and the concentration broke and it turned to be a highly competitve market.

It can be said to be a created monopoly situation where customer is given very similar choices. So its a kind of nominal level of competition. Automobile industry is also an example where comanies keep prices above a certain limit which may be a reason of only a few choices.