Why might price collusion in oligopoly industry occur?.
Collusion occurs when firm get together and agree on price and output condition.
Oligopolistic industry tend to promote collusion since the number of firm is small and.
The firms recognize their interdependence and therefore foresee a lot of advantages such as: .
Maximize their joint profits as they agree to set a price to charge .
Decreases the competition which reduces risks of uncertainty.
Firms are more likely to agree not to compete on price where the product is fairly standardized .the agreed price is normally well above the average costs of more efficient firms since, in order to persuade enough firms to join the scheme to make it operational, the price must be high enough to provide profits for the less efficient. In order to make the price effective ,a price agreement is usually supported by a complementary agreement to limit output.
Asse s the economic desirability of collusive prices?.
From the firms prospective (firms in an oligopoly):.
Collusive behavior in an oligopoly is desirable for the firms in the oligopoly as the basic problem for a firm in an oligopoly is to try a d predict how the rival firms are going to react .This makes the firms in an oligopoly uncertain as their decision can affect the market. One way of reducing this uncertainty is to agree to restrain their independent decision making. If they collude they limit their ability to use changes in price to try and increase sales. However, due to few firms oligopoly can enjoy collusive behavior which is profitable for the firms in an oligopoly as the uncertainty to take risks is reduced by collaborating in setting up prices. .
From the consumers Point of View:.
When the members of an oligopolistic market are acting as a cartel, they lose their ability to compete for customers by varying prices. In the absence of price competition, firms are more likely to undertake forms of non-price competition, such as marketing competition, including obtaining `exclusive` outlets such as petrol stations through which oil companies can sell their products.
