Collusion

maximin strategy

a strategy chosen to maximize the minimum gain that can be earned

Collusion between firms whether formal or informal is more likely when:

1) only few firms in the industry, reaching an agreement is easier and any cheating can be spotted quickly 2) similar costs of production and methods of production making any agreement or price easier to reach 3) firms produce homogenous products 4) the products have price inelastic demand meaning that a rise in price by the cartel will lead to a rise in sales revenue for the firms 5) laws against collusion in a country are weak or ineffective

kinked demand curve

1) raise prices - elastic sector - other firms will not respond and consumers will switch away from the firm raising its price - rise in price fall in demand - firm experiences a decrease in total revenue 2) lower prices - firms in market would follow suit price war would ensue, meaning none of the firms will gain significant increase in their market share - demand for good relatively inelastic - price of the good falls larger % than quantity rise : decrease in total revenue 3) therefore suggests firm is best keeping its price at p1 Counter argument to collusion

1) in theory it will be in the interest of all firms in the market to charge a Hugh price and thereby maximise their profits

2) interdependent - cautious about other firms lowering their price all firms tend to default towards the lower price - non-price factors become important

Collusion

An agreement between two or more firms to limit competition and therefore divide the market, set prices or output and increase the welfare gains off the firms concerned to the detriment of other firms and consumers

Cartel

Formal collusive agreement Can achieve the same profits as if the industry were a monopoly

Tacit

Looks like collusion has taken place (prices are similar/moving at the same time) but no evidence appears for it as it appears no communication has taken place. Prices might be similar because firms follow price leaders Implicit

Overt

Openly Can take place in between countries, in particularly oil. Occurs when a cartel has developed e.g. OPEC

Effect on consumer

Raise prices to the detriment of the consumer Firms can take advantage of artificially high prices as long as the other firms do not cheat as well - reduce consumer surplus - increase producer surplus - welfare loss

Covert

Secretly Takes place behind the scenes and is secret but communication between firms has definitely taken place