Week 9 Flashcards
collusive and competitive oligopoly
Why would rival firms want to collude with each other
what is the profit incentive for collusion
a price war is a race to the bottom as shown in the black column, that is bad for everyone apart from consumers
therefore by colluding at the price £8 everyone makes the greatest profit that is mutually beneficial to all the firms
what is the barrier to entry incentive for collusion
setting predatory pricing to push out new entrants and generate long-run supernormal profits
what are the 2 forms of collusion
overt collusion definition
can be done to improve health and safety standards which improves public welfare but mainly through cartels and price fixing
tacit collusion definition
how do you show supernormal profit in a cartel diagram for a particular firm in a 2 firm oligopoly
firms operate a profit maximise (MR=MC)
how do you show the incentive to cheat on a cartel diagram
by producing more and exceeding the quota
> they can undercut the other firm and get more demand
> therefore their profits increase shown by purple
when do you use game theory
to show it is rational to cheat if you believe the other firm is going to cheat
what 3 factors need to be present to increase the chances of cartel success
why can a cartel easily be destroyed
because all firms have an incentive to cheat shown using game theory
why are cartels illegal
> higher prices
-> forces competition out
–> restricting the need to innovate as they have the means but no incentive
how can cartels be stopped
due to the regulation of the CMA what is the easiest way to collude
tacit collusion
how does tacit collusion work using price leadership
why is tacit collusion difficult to prove (evaluation point)
very hard to prove unless there is real evidence or a whistle blower (snitch)
is collusion always bad
