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What is the difference between collusive and non-collusive oligopoly?

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

Last updated 4 Sept 2023

Collusive and non-collusive oligopoly are two different types of market structures characterized by the behaviour of firms within the industry. These terms describe how firms in an oligopolistic market interact with each other in terms of pricing, output, and competition. Here's a breakdown of the key differences between collusive and non-collusive oligopoly:

Collusive Oligopoly:

  1. Definition: Collusive oligopoly refers to a situation in which a small number of firms (oligopolists) within an industry coordinate their actions to maximise joint profits. In other words, these firms work together, often through explicit agreements, to act as if they were a single entity in the marketplace.
  2. Behaviour: In collusive oligopoly, firms may engage in collusion, which involves agreements or understandings to set prices, output levels, or market shares. Collusion can take various forms, such as price-fixing, production quotas, or market sharing.
  3. Mutual Interdependence: Firms in collusive oligopoly are highly interdependent, meaning they consider the reactions of their rivals when making pricing and production decisions. They often act as if they were a monopolist, collectively determining market behavior.
  4. Objective: The primary objective of firms in collusive oligopoly is to maximize joint profits, which may involve maintaining higher prices and limiting production to achieve this goal.
  5. Examples: Cartels, where firms in the same industry formally agree on pricing and output levels, are classic examples of collusive oligopolies. The Organization of the Petroleum Exporting Countries (OPEC) is one example of a cartel in the oil industry.
  6. Legality: Collusive behaviour is generally illegal in many countries and is often subject to antitrust or competition laws. Such agreements to restrict competition are seen as harmful to consumer welfare.

Non-Collusive Oligopoly:

  1. Definition: Non-collusive oligopoly, on the other hand, refers to a situation where firms in an oligopolistic market compete with each other and do not engage in explicit collusion or coordination. Each firm makes decisions based on its own interests and market conditions.
  2. Behaviour: Firms in non-collusive oligopoly compete vigorously with each other, often through price competition, advertising, product differentiation, and other competitive strategies. They do not engage in formal agreements to set prices or output.
  3. Mutual Interdependence: While firms in non-collusive oligopoly are still interdependent and consider the reactions of rivals, they do not coordinate their actions through agreements.
  4. Objective: The primary objective of firms in non-collusive oligopoly is to maximize their individual profits, which may involve price competition to gain market share or expand their customer base.
  5. Examples: Many industries with a few dominant firms, such as the automobile industry, are considered non-collusive oligopolies. These firms compete aggressively but do not engage in explicit collusion.
  6. Legality: Non-collusive behavior is generally legal, as long as firms do not engage in anticompetitive practices, such as predatory pricing or monopolization, that violate antitrust laws.

In summary, the key difference between collusive and non-collusive oligopoly lies in the behavior of firms within the industry. Collusive oligopoly involves firms coordinating their actions through agreements to maximize joint profits, while non-collusive oligopoly features firms competing independently to maximize their individual profits. Collusive behavior is often illegal due to its potential harm to competition and consumers, while non-collusive behavior is generally legal as long as firms compete within the bounds of competition laws.

In a nutshell:

Here are the key differences:

  • Collusive oligopoly: In this type of oligopoly, a few firms agree to set prices or allocate markets to maximize their profits. This typically occurs through secret agreements or price signaling. The firms behave as if they were a single firm and they avoid competing with each other.
  • Non-collusive oligopoly: In this type of oligopoly, firms compete with each other but don’t engage in collusion. They may set prices independently or compete on factors like product quality, advertising, or service.

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