Imperfect Competition - Key Concept Pairs

What’s the difference between these pairs of key concepts for students of Year 2 micro looking at imperfectly competitive markets such as oligopoly and duopoly?

Overt and tacit collusion

Overt collusion is a clear attempt to control market supply to achieve the desired price set by a group (cartel) of producers. A really good example of this is the maple syrup cartel operated in Canada. Read more here on the Federation of Quebec Maple Syrup Producers.

Tacit collusionhappens in imperfectly competitive markets where businesses choose to make informal agreements or collude on price without speaking to their rivals. This maybe to avoid detection by industry regulators since most forms of price fixing are illegal and can lead to fines of up to ten percent of annual turnover and prison sentences for executives found guilty of price collusion. Read this article on economic research on tacit collusion between petrol retailers in Australia (2017)

Predatory pricing and limit pricing

According to the OECD, predatory pricing is a deliberate strategy of driving competitors out of the market by setting very low prices or selling below average variable cost. Once existing firms have been driven out and entry of new firms deterred it can raise price to secure higher revenues and profits (producer surplus). Predatory pricing is illegal under the competition laws of most countries but is often difficult to prove.

This article in the Guardian (February 2019) hints at the use of predatory pricing by some digital platform businesses as a way of wiping out competition ahead of a company listing on the stock market.

This article (published in 2017) looks at some unusual examples of predatory pricing that eventually came to court.

Limit pricing is pricing by the incumbent firm(s) to deter entry or the expansion of fringe firms in the market. The limit price is below the short run profit maximising price but above the price we would expect to see at the competitive level. Limit pricing means a short-term departure from profit maximisation. If successful, businesses can maintain their market power and then make higher supernormal profits in the long term.

Product differentiation and price discrimination

Product differentiation means making the product different from its competitors. Product differentiation can be achieved through…

Distinctive design– e.g. Dyson; Apple iPhone

Branding - e.g. Nike, Under Armour

Performance - e.g. Mercedes, BMW

A key term to remember is USP, which is the acronym for Unique Selling Point. A Unique Selling Point (sometimes called a Unique Sales Proposition) is a feature or benefit that separates (or differentiates) a product from its competitors.

Find out more about product differentiation here

Price discrimination occurs when a business charges a different price to different groups of consumers for an identical good or service, for reasons not associated with costs of supply. Price discrimination is common in nearly all imperfectly competitive markets. There are loads of study resources on price discrimination available in this Tutor2u collection.