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.
Related Terms
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
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