Definition
A collusive oligopoly is an industry containing a small number of producers where the producers collaborate, either expressly or tacitly, to control prices and divide output markets. These agreements help the producers maximize their collective profits while avoiding competitive market pressures. The firms act almost like a monopoly, setting prices higher than would prevail under competition.
Key Features of Collusive Oligopoly
- Few Producers: The industry has a limited number of firms.
- Price Fixing: Producers agree on prices, avoiding price competition.
- Market Allocation: Firms might divide markets geographically or by customer type to reduce competition.
- Cartel Formation: Sometimes leads to the formation of cartels, which are formal agreements among competitors.
Examples
OPEC (Organization of the Petroleum Exporting Countries)
One of the most well-known examples of a collusive oligopoly is OPEC. This organization comprises member countries that collaborate to manage the supply of oil to control its market price. The member countries agree on production quotas to influence global oil prices.
De Beers Group
Historically, De Beers controlled the diamond industry by forming agreements with other producers and implementing strategies to regulate the supply and price of diamonds.
Airline Alliances
Airlines often form alliances, such as Star Alliance or SkyTeam, where they collaborate on scheduling, marketing, and pricing strategies to optimize revenues and reduce competition.
Frequently Asked Questions (FAQs)
What distinguishes collusive oligopoly from a monopoly?
- A monopoly has a single producer, whereas a collusive oligopoly has multiple producers collaborating as if they were a single entity, under mutual agreements to avoid competition.
Are collusive oligopolies legal?
- In many jurisdictions, collusive practices like price-fixing and market allocation are illegal under antitrust laws.
What are the economic impacts of collusive oligopolies?
- They can lead to higher prices and reduced output compared to competitive markets, potentially resulting in welfare losses for consumers.
How do regulators prevent collusive oligopolies?
- Agencies enforce antitrust laws to investigate and break up illegal agreements, imposing fines and restrictions on the firms involved.
Cartel
A cartel is a formal agreement among competing firms in an industry to control prices and limit output. Cartels are often illegal due to their anti-competitive nature.
Oligopoly
An oligopoly is a market structure characterized by a small number of firms whose decisions impact each other. Oligopolies may be competitive or collusive.
Monopoly
A monopoly is a market structure where a single firm dominates the market, controlling the supply and pricing of goods or services.
Online References
- Investopedia: Collusive Oligopoly
- Wikipedia: Oligopoly
- Federal Trade Commission (FTC): Price Fixing
Suggested Books for Further Studies
- “Industrial Organization: Contemporary Theory and Empirical Applications” by Lynne Pepall, Daniel J. Richards, and George Norman
- “Microeconomics of Market Failures” by Bernard Salanié
- “Collusion: How Central Bankers Rigged the World” by Nomi Prins
Fundamentals of Collusive Oligopoly: Economics Basics Quiz
### Who primarily benefits from a collusive oligopoly?
- [ ] Consumers
- [x] Producers within the oligopoly
- [ ] Government regulators
- [ ] New market entrants
> **Explanation:** Producers within the oligopoly benefit from collusion through higher prices and controlled market conditions which increase their collective profits.
### What anti-competitive practice do collusive oligopolies often engage in?
- [x] Price fixing
- [ ] Product differentiation
- [ ] Market entry investments
- [ ] Quality decreases
> **Explanation:** Collusive oligopolies often engage in price fixing to maintain higher prices and secure their market positions without competing against each other.
### What is the main legal tool used against collusive oligopolies?
- [ ] Tariffs
- [ ] Export subsidies
- [x] Antitrust laws
- [ ] Price floors
> **Explanation:** Antitrust laws are designed to prevent anti-competitive practices like collusion and ensure fair competition in the market.
### Which industry is a prominent example of a collusive oligopoly?
- [ ] Pharmaceutical industry
- [x] Oil industry (OPEC)
- [ ] Technology sector
- [ ] Retail industry
> **Explanation:** OPEC, in the oil industry, is a well-known example of a collusive oligopoly where member countries agree on oil production quotas to influence prices.
### What is the primary goal of forming a cartel?
- [x] To maximize collective profits
- [ ] To increase consumer satisfaction
- [ ] To foster innovation
- [ ] To ensure product safety
> **Explanation:** Cartels are formed to maximize the collective profits of the member firms by controlling prices and reducing competition.
### What happens to consumer welfare in a collusive oligopoly?
- [x] It generally declines
- [ ] It remains unaffected
- [ ] It significantly improves
- [ ] It sees no meaningful change
> **Explanation:** Consumer welfare generally declines in a collusive oligopoly because prices are kept artificially high, reducing consumer surplus and overall welfare.
### Under what circumstance can a collusive oligopoly exist without formal agreements?
- [ ] Through government intervention
- [ ] In perfect competition
- [x] Through tacit understanding
- [ ] Through significant advertising
> **Explanation:** Collusive oligopolies can exist without formal agreements through tacit understandings where firms implicitly adhere to mutual pricing and output strategies.
### What is a common consequence of breaking cartel agreements?
- [x] Price wars
- [ ] Market stabilization
- [ ] Increased product quality
- [ ] Consumer loyalty
> **Explanation:** When cartel agreements are broken, it often leads to price wars where firms competitively lower prices to maintain market share, destabilizing the market.
### Which government agency in the U.S. plays a major role in combating collusive practices?
- [ ] Food and Drug Administration (FDA)
- [x] Federal Trade Commission (FTC)
- [ ] Environmental Protection Agency (EPA)
- [ ] Federal Communications Commission (FCC)
> **Explanation:** The Federal Trade Commission (FTC) plays a major role in investigating and combating anti-competitive practices, including collusive behavior in oligopolies.
### What distinguishing factor prevents oligopolies from always becoming collusive?
- [x] Competitive pressures among firms
- [ ] Legal contracts
- [ ] High product demand
- [ ] Uniform product standards
> **Explanation:** Competitive pressures, such as the threat of losing market share or new entrants, often prevent oligopolies from formally colluding to control prices and output.
Thank you for embarking on this journey through our comprehensive economics lexicon and tackling our challenging sample exam quiz questions. Keep striving for excellence in your economic knowledge!
