"Briefly describe the factors affecting collusion in pricing games."

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Expert Solution

Number of firms in the market : The higher the degree of concentration of firms in a market the higher will be the incentives to collude. Firms in highly concentrated markets tend to collude because all the profits are distributed amongst fewer firms.
Multi market contact or Punishment mechanisms : If the firms compete in more than one market, there are higher chances of collusion. Firms that compete with other firms over many markets establish trigger strategies that can be applied in all these markets, which will create a devastating punishment strategy.
Market transparency: the more transparent a market is, the lesser will be the collusion. It will be easier to ensure that every firm is following the same strategy and is not deviating from the agreement.
Asymmetry : the bigger the asymmetry, the harder it is for the collusion to take place. If firms have different cost structures, the one with the lowest costs will be at advantage, thus causing the other firm to exit the market.

Rahul Sunny answered 8 months ago

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