Microeconomics Report

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(i) Collusion is common among oligopoly firms. Discuss the factors that make collusion likely to succeed. Use the relevant industry to support your answer. Oligopolistic firms are known to be independent as there are only a few sellers dominating the market; therefore changes in the price, sales or output of a firm will surely affect their competitors. The telecommunication industry in Malaysia exhibits the oligopoly market. For instance, Maxis or Digi customers are more likely to subscribe to Celcom Blackberry Internet Service if Celcom provides a lower price for their Blackberry Internet Service plan. Hence, many oligopolistic companies have colluded to avoid price wars, price rigidity and to obtain higher long term profits. Motta (2004) finds that the number of firms in an industry is a factor that make collusion likely to succeed, ceteris paribus, will facilitate collusion. If there are only 2 or 3 firms in the oligopoly, then it is fairly easy to collude to set prices or to limit competition. Firms are less likely to benefit from collusion when the number of firms increases in the industry (Osborne 1976 and Vives 1999). Consequently, firms under oligopoly have price collusion to create barriers to new comers. If other firms are prevented from entering the industry through high entry barriers, then the colluding firms can safely keep prices high without this threat of competition. High barrier to entry allows Maxis, Digi, Celcom and U mobile to operate under a less competitive market thus allowing these companies to dominate the market share in the long-run. In addition, a smaller market share makes it easier for oligopoly firms to organize and communicate.

Since collusion is a self-enforced agreement (Bolotova, Connor & Miller 2005), the oligopoly firms tend to cheat by producing more than the collusive output to obtain short run profits (http://fds.oup.com/www.oup.com/pdf/13/9780198297284.pdf). Therefore, close monitoring on the respective firms’...
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