Study Notes on Cartels, Oligopolies, and Antitrust Laws

Cartels are largely illegal due to laws preventing collusion among companies.
Existence of a well-known cartel today: OPEC (Organization of the Petroleum Exporting Countries).

OPEC is a cartel of oil-producing nations, allowed to exist because:
- It consists of nations cooperating, not companies.
- Coordinates oil production to maximize profits and prices for its member countries.
- Had significant influence over global oil prices until mid-2000s.

Controlled 90% of U.S. oil production.
Founded by John D. Rockefeller, who was known for ruthless business tactics.
- Created a trust by forcing oil refineries to join his company.
- Controlled all aspects of the oil industry, including transportation and refining.
Resulted in:
- Higher prices for consumers due to monopolistic practices.
- Creation of Deadweight Loss in the market, where less is produced than could be at competitive levels.

Represents inefficiencies in the market due to monopolistic practices.
Illustrated in monopoly graphs as a triangular area indicating lost consumer and producer surplus.

Definition: Oligopolies cannot formally collude, but can engage in tacit collusion, which is recognizing that their actions influence competitors.
- Example: Tip for Tap strategy in price-setting among competitors.

Competitors adjust their pricing based on each other’s actions without formal agreements.
Highlighted by examples of gas station pricing: if one lowers prices, others must respond to maintain competitiveness.

Number of Firms in an Oligopoly:
- More firms complicate cooperation; easier to blame or identify cheaters when there are fewer competitors.
- Greater opportunity for cheating increases with more players.
Complexity of Products:
- Example: Cell phone service includes not just service pricing but also device sales and accessories, leading to more opportunities for individual firms to compete on features rather than price.
Different Interests Among Firms:
- Firms may have differing views on market share based on service quality, market coverage, or time in the industry.
- Disagreements on how to split the market evenly complicates tacit collusion.
Power of Buyers:
- Buyers with significant power can influence pricing, as seen with retailers like Costco.
- Costco’s strategy involves leveraging its purchasing power to negotiate lower prices from suppliers, thus affecting oligopoly dynamics.

Oligopolies often engage in product differentiation to create perceived variances between their offerings, enhancing pricing power.
Methods include changing product features, advertising, and packaging.

Running shoes: Different technologies (e.g., air soles, cushioning) create perception of superiority.
Fast Food: Variation in menu items (e.g., Taco Bell, Pizza Hut) despite similar core offerings.
Streaming services differentiate their selections to attract consumers despite offering similar platforms.

Definition: The largest firm in an industry sets a price, which smaller firms follow.
Example: When United Airlines raises baggage fees, other airlines typically match that increase.

Prevalence: Oligopolies are more common than monopolies and perfect competition, affecting many industries.
Economic Profits: Collusive behavior may lead to economic profits that are only marginally higher than competitive levels due to inherent incentives to cheat.
The analysis of oligopolies is complex due to interdependent behaviors:
- More cheating leads to outcomes closer to perfect competition with reduced deadweight loss.
- Conversely, successful collusion leads to higher prices and increased deadweight loss.

Monopoly: Highest deadweight loss.
Colluding Oligopoly: Moderate deadweight loss.
Non-colluding Oligopoly: Minimal deadweight loss, closer to perfect competition.
Perfect Competition: No deadweight loss.