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Collusion and Game Theory (Short Answers)

Level:
AS, A Level, IB
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 28 May 2017

Here is a short video covering two short questions. What is collusion? Using game theory, explain the potential benefits from collusion between firms.

Collusion and Game Theory (Short Answers)

What is collusion?

  • Collusion is any explicit or tacit agreement between suppliers in a market to avoid competition either by price fixing or market sharing. 
  • The main aim is to achieve a level of joint profits similar to that which might be achieved by a pure monopolist.

Using game theory, explain the potential benefits from collusion between firms

  • In the game theory example shown in the table, there is an incentive for both firms to collude by charging a high price. 
  • This gives joint profits of $8m. 
  • If they competed at a low price, total profit would fall to $2m

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