A) Distinguish between a collusive and non collusive oligopoly (10 marks) * * Oligopoly, is a market form in which where few sellers dominate the market for an identical or differentiated good, and where there are high barriers to entry. The market is determined by very few, however very large firms. The barriers of entry are very significant, as they include high initial fixed costs, access to resources and economies of scale and legal barriers. Unlike perfect competition where there are identical products, in an Oligopoly you have differentiated or homogenous goods.Oligopoly is also known as a very interdependent market due to the small amount of firms which are present, in other words, it is very competitive, since a change in a single firm has a big impact on the other firms.
Therefore oligopolistic firms turn into a collusive oligopoly. A collusion is an agreement whether forma or informal between competitive parties to limit competition and raise prices. Oligopolies agree to take specific actions such as a change in price or other agreements in order to increase their profit.
This however is legal in the UK and EU and since it mostly is an informal agreement, in other words no valid documents are included, it is almost impossible to prove such actions. B) Evaluate the view that governments should use strong policies to control collusive behavior by oligopoly (15 mark) Due to the existing interdependence in oligopolies, firms consider to collude to limit competitors. Unlike in perfect competition and monopolistic competition, firms are too small to influence or control the market.Whereas in a oligopolistic market, there are a few firms, however very powerful firms. * As there are only a very few firms, each needs to take careful notice of each other’s action. * When firms collude, they have an agreement whether formal or informal between competitive parties to limit competition and raise prices. Sometimes, this turns into a cartel formation.
Oligopolies agree to take a specific market action to increase profits. Cartels however are continuous business agreements and often aim to out compete, other firms.They restrict output, to drive up prices. They might agree to not advertise at all and stop competing at all or fix prices within a specific range. If they fix prices, they act as an monopoly and produce at the profit maximization output where Marginal cost is equal to Marginal revenue.
The difficulties in cartel formation is that price fixing is illegal in the EU and the UK. As well as the fact that if firms successfully coordinate, some industries can draw competition if they are earning dramatic economic profits.