Agreeing with other industry members what price to charge is known as collusion. Collusion is defined as “Action in concert without any formal agreement… [it] is common when anti-monopoly legislation makes explicit agreements illegal or unenforceable. Its existence is [sometimes] extremely difficult to prove” Black et al (2012). Within this analysis, I will explain what collusion is, the different types, why firms may enter into this agreement, then outline a past example and finally explain why this silent or spoken agreement may break down. Collusive agreements or cartels may however be created by governments to protect and positively influence markets, examples of this are the US sugar manufacturing cartel (operating between 1934-74) and OPEC which is still in operation today.
Collusive behaviour exists only within an Oligopoly market structure as a result of the extreme mutual interdependency of firms. Some examples of markets where oligopolies may be found are the Tobacco industry, soft drinks and gas distribution. Parkin et al (2008). An oligopoly is defined as “a few sellers [that] dominate the market… [it] might have dozens or even hundreds of individual firms but most of them are unimportant in the industry; a small number of them…dominate the industry.” California State University Department of Economics. (2014) there are two unique characteristics within oligopoly not witnessed in any other market structure; they are mutual interdependence and repeated interaction. Others include a “high concentration ratio, either a homogenous or differentiated product or both high and low barriers to entry” Dawson, Chris (2013).
“Mutual interdependence exists when the actions of one firm [have] a major impact on the other firms in the industry.” California State University Department of Economics. (2014) this theory is a key component and a unique characteristic of this market structure. Firms may choose to collude within this market due to the benefits gained through making shared decisions such as gaining a bigger share of market profits. Dawson, Chris. (2013)
Collusive behaviour may be identified through any of the following characteristics. “A few firms, firms with similar production methods, costs and products, presents of a dominant firm, significant barriers to entry, stable industry and no government measure to control the market.” Dawson, Chris. (2013) Lecture 2&3 Oligopoly. The University of Bath, unpublished.
As a process, collusion is defined “when firms are able to agree to act in ways that benefit all who engage in this collusion. Firms have a clear incentive to collude as successful collusion leads to higher profits.” California State University Department of Economics. (2014)
The diagram (Economics help- helping to simplify economics. (2014).) shows the effects of collusion upon the price of a good or service. The demand curve id D=AR and the industry marginal cost curve is MC. Within operation, the MC curve is the equivalent...