Question

How does efficiency impact collusion?

Answer 1

The firms collude in order to maximise their profits. They aim at maximising profit by colluding and acting as a monopoly firm, that is, the single seller. And charging a higher price because of monopolistic power (that is, price makers) that they enjoy by colluding. Thus, increasing price increases the revenue to the firm, and so is profit to a colluded firm is increased from the status quo. But the increase in price lowers quantity demanded from the efficient quantity demanded (that is, quantity corresponding to price is equal to marginal cost). Thus, collusion although increases the profit to the colluded firm and it also result in the loss to the society because of not fully utilisation of given resources, which is called a deadweight loss(that is a loss to society from not able to attain free market equilibrium). This is shown in the diagram below -

Therefore, the efficiency calls for no collusion of firms as collusion gives power to firm act as a monopoly as charge higher price. Charging higher price lower the quantity demanded from the efficient level which results in a deadweight loss to society, that is, inefficiency. So, efficiency impacts the collusion negatively, that is, if higher chances of efficiency are to be attained then lower are the chances of collusion of firms.