Collusion and Game Theory (Short Answers)
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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.
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