Collusive Oligopoly

Topics: Collusion, Oligopoly, Cartel Pages: 3 (934 words) Published: November 2, 2012
Economic and Social benefits of collusion:
Collusive oligopoly can bring about economic benefits to consumers. Firstly, cartels results in a uniform market structure with one price and one level of output produced. The result is greater consumer or business confidence, as expenditure can be more easily planned. One example of where prices were maintained relatively constant would be oil in the 1990s; where OPEC aimed to charge between $25 and $35 per barrel of oil. In doing so, businesses requiring oil as a raw material had the confidence to make long-term cost predictions. The ability to make such predictions often gives producers the confidence to invest and boost the long-term profitability of the firm. Cartels may also provide social benefits in markets for demerit goods. In the cigarette market for example, if firms were to collude on higher prices for tobacco, fewer cigarettes would be ‘consumed’ and welfare would be improved. There is also no need for oligopolies to spend large amounts on publicity and advertising, since each firm is operating in the same way under a cartel. The result of these higher profits mean there are more spare funds for investment and innovation, which would ultimately benefit consumers in the long run.  The interdependency of oligopolies under a cartel also allows for the cooperation of research and development. There can also be joint investment in capital and labour. The resulting decreased production costs provide spare funds for product development. Disadvantages:

Collusion can take one of two forms.
Explicit collusion results when two or more firms reach a formal agreement. Implicit collusion results when two or more firms informally control the market without necessarily reaching a formal agreement. By acting like a monopoly, the colluding firms can set a monopoly price, produce a monopoly quantity, generate monopoly profit. For example if all firms collude to set artificially high prices then the consumer will...
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