interdependence of oligopolies

Formal collusion:

• Firms make agreements(officially) to restrict output and raise prices

• Illegal!!

Tacit collusion:

• Firms follow each other without formal agreement/explicit communication

• Usually happens when there is price leadership

Collusion

Firms come together to agree on actions in their best interest (eg. Limiting output to raise prices)

Cartels

Group of firms making formal agreements to limit competition in market (formal)

• Through limiting output to raise prices

Positive impacts of cartels on consumers

• Cartels having high percentage of market share means they benefit from economies of scale

  • May lower prices for consumers, though not likely

• Firms could use profit to innovate and improve quality

  • Leads to more efficient production methods

Negative impacts of cartels on consumers

• May suffer from high prices if firms lower production quota and raise prices (as they own high % market)

  • Magnitudes depends on type of good (commodities vs luxury goods)

Positive impacts of cartels on employees

• High profits could ensure job security and benefits

  • High market share firms aren't likely to close, however not ensured to pass profits down to employees

Negative impact of cartels on employees

• Monopsony (few powerful firms)

  • Lowers jobs available(less buyers of labour) and decreases employee rights

Positive impacts of cartels on firms

• Firms in cartel can charge higher and earn more profit

• If cartels lower production quota, independent firms could:

  • Price match and earn profit

  • Keep price and gain customers THOUGH cartel could lower price more until firm driven out

Negative impacts of cartels on firms

• If cartel increases production quota, independent firms could be driven out

  • Cant match low prices below ATC

  • Firms may use commodities as inputs, cost of production increases if good cartel is selling is commodity

Positive impacts of cartels on governments

• High tax revenue

  • Cartel high market share, increases amount taxed

Negative impacts of cartels on government

• Powerful cartel could avoid tax

  • Influence government/tax avoidance

  • Less innovation if less competition

• If prices too high, state provision may be necessary

• Worry/policing for monopolies

Game theory dominant strategy

Non-colluding

• Action that firm takes regardless of what other firm takes

• Usually not the same as what the optimum action is for both firms

Payoff matrix

Dominant strategy (without collusion) is to steal, none end up getting

• optimum would be for both to share

Game theory definition

• Branch of mathematics that studies strategic-decision making

• Used to examine best strategy for a firm for each assumption of rival’s behavior

• Behavior of non-collusive oligopoly depends on how it thinks its rivals will react

Payoff matrix evaluation

• Hard to make accurate business predictions

• forecasts are theoretical, massive information gaps

• Agents may not behave rationally, but matrix assumes they do

• Entrepreneurs might be strong risk-takers, or risk-averse during recession