Oligopoly - Collusion and Cartels | Economics Revision

Summary

This video explores the concept of collusion within oligopolistic markets, focusing on cartels and their effects on competition. It outlines the different forms of collusion—horizontal, vertical, and tacit—while examining how firms in oligopolies can work together to maximize profits, often at the expense of consumers. The video discusses the legal and illegal aspects of collusion, real-world examples, and the penalties for firms involved. It also highlights the potential harm to consumer welfare, including higher prices, reduced innovation, and less market competition, while emphasizing the role of competition authorities in regulating such behavior.

Takeaways

• 😀 Collusion in oligopolies can take the form of **horizontal** (firms at the same production stage) and **vertical** (firms at different stages of production) collusion.
• 😀 **Explicit collusion** involves formal agreements between firms, whereas **tacit collusion** is informal and harder to prove, often like a gentleman’s agreement.
• 😀 Not all collusion is illegal. Some instances are allowed by the EU if they contribute to improved production, distribution, or technical progress in a market.
• 😀 **Business cooperation** between competing firms can lead to innovations and industry improvements, such as advances in environmental technology or safety standards.
• 😀 The goal of a cartel is to **maximize joint profits**, reduce competition costs, and increase producer surplus by acting together rather than competing.
• 😀 A cartel operates on **output quotas** that individual firms must adhere to, but firms may be tempted to cheat by exceeding their quotas for higher profits.
• 😀 **Real-world examples** of collusion include pharmaceutical companies engaging in 'pay-for-delay' schemes and Apple’s ebook price-fixing scandal.
• 😀 Collusion generally harms consumers by raising prices, reducing output, limiting competition, and reducing innovation, leading to less consumer choice.
• 😀 Factors making collusion easier include weak regulation, low penalties, firms with a high market share, standardized products, and strong brand loyalty.
• 😀 Cartels often break down due to **overproduction**, reduced demand during recessions, exposure by competition authorities, or the entry of non-cartel firms into the market.
• 😀 In the UK, penalties for collusion include fines of up to **10%** of worldwide turnover, imprisonment of up to five years, and asset confiscation. Whistleblowers can receive immunity from penalties.

Q & A

What is collusion in an oligopoly?

Collusion in an oligopoly refers to firms within the same market working together to set prices, limit production, or divide markets in a way that reduces competition and maximizes profits. This can be either explicit or tacit.

What are the three forms of collusion mentioned in the script?

The three forms of collusion are: horizontal collusion (firms at the same production stage, such as supermarkets fixing prices), vertical collusion (firms at different stages of production, such as a supermarket colluding with a farmer), and tacit collusion (informal, non-explicit agreements, often harder to prove).

How is explicit collusion different from tacit collusion?

Explicit collusion is a deliberate and overt agreement between firms, often written and formal, whereas tacit collusion involves unspoken, informal agreements that are harder to prove, such as mutual understandings or 'gentlemen’s agreements'.

Why might some collusive behavior be legal?

Collusion may be legal if it leads to improvements in production, distribution, or technical progress that benefit consumers. For example, firms working together to develop eco-friendly technology or improve industry safety standards may be deemed legal if they bring societal benefits.

What are some examples of legal collusion provided in the script?

Examples include joint development of mobile phone charger standards in Europe, and collaborations between car manufacturers to produce technology that reduces CO2 emissions, both of which can improve consumer welfare and technological progress.

What is the main goal of firms in a cartel?

The main goal of firms in a cartel is to maximize joint profits by collaborating on pricing, production quotas, and market behavior, which reduces competition and allows firms to gain higher profits than if they acted independently.

How does collusion reduce uncertainty for businesses?

Collusion reduces uncertainty by allowing firms to set predictable prices and output levels, decreasing the competitive pressures and making it easier for businesses to plan and achieve higher profits.

What are the potential risks for a cartel when a firm exceeds its output quota?

If a cartel member exceeds its output quota, it can threaten the stability of the cartel by distorting the agreed-upon price and output levels. The firm may earn additional supernormal profits in the short term, but this undermines the cartel's price-fixing agreement and could lead to its collapse.

What are some real-world examples of companies found guilty of anti-competitive behavior?

Examples include pharmaceutical companies like GlaxoSmithKline, Apple for conspiring with publishers to increase ebook prices, and Google for illegally steering users towards its own shopping services. These companies were fined for engaging in anti-competitive practices that harm consumers.

What factors make collusion easier to achieve in an industry?

Collusion is easier to achieve when industry regulators are weak, penalties for collusion are low, firms control a large percentage of the market, products are standardized, and firms can communicate effectively and trust each other. A strong brand identity can also make it easier for firms to raise prices without losing customers.