4.1.5.5 Non-collusive/Collusive oligopolies, Regulation

non-collusive oligopoly

a situation where firms in an oligopolistic market compete and do not engage in explicit collusion or coordination

collusion

secret or illegal cooperation or conspiracy in order to deceive others

Kinked demand curve

• Stable prices in a non-collusive, competitive oligopolistic market

• This model suggests that prices will be fairly stable and there is little incentive for firms to changes price

firms seek to max profit, MR = MC

What does the kinked demand curve assume?

share, uncompetitive, elastic, increase, firms, prices, demand, inelastic, rigid

Kinked demand curve:

If firms increase price, then they will lose a large _____ of the market because they become _____________ compared to other firms. Therefore, demand is ______ for price increases.

If firms decrease price, then they would gain a big _________ in market share. However, it is unlikely that other _____ will allow this. Therefore other firms follow suit and cut _____ as well. Thus _______ will only increase by a small amount. Demand is ________ for a price cut. Therefore, this suggests that prices will be _____ in oligopoly.

market conduct

Oligopolies can also be defined by the pricing and marketing policies pursued by firms. This is also known as market behaviour.

price and output, profit, rivals, react

An oligopolistic firm affects its rivals via its ____ and ______ decisions, but its own _____ can also be affected by how _____ behave and _____ to the firm’s decisions.

cartel

a collusive agreement by firms, usually to fix prices. Sometimes there is also an agreement to restrict output and to deter the entry of new firms

abnormal profit

What do cartels and illegal collusion protect for their members?

OPEC(Organisation of the Petroleum Exporting Countries), which supplies 40% of the world’s crude oil and 80% of the world’s crude oil reserves

Application for collusion

Saudi Arabia, Venezuela, Iraq, Iran, Kuwait

Who are some of OPEC’s memvers?

monopoly

Collusive oligopolies share the same diagram as:

Competition and Markets Authority(CMA)

Orgs like this work to maintain competition in markets and ensure they are working for the consumer’s benefit.

price leadership, price agreement

What does the CMA aim to tackle?

price leadership

covert collusion that occurs when one firm becomes the market leader and other firms in the industry follow its pricing example.

price agreement

a cartel often fix the prices that all the members of the cartel charge by forming a price ring. Can also be made between firms and their supplies, or between firms.