A collusive oligopoly happens when companies in a market work together instead of competing. By cooperating, they aim to act like a single monopoly to increase their profits.
Types of collusion:
- Formal collusion (Cartels): Companies make a clear, explicit agreement to fix prices, limit production, or divide market shares. This is frequently illegal under competition laws. An example is OPEC, a group of oil-producing countries.
- Tacit collusion: Companies follow an unspoken, informal understanding without a direct agreement. This often happens when a dominant company sets the price, and others follow their lead.
Goals of cartels:
- To maximize the total profit of all members.
- To reduce business uncertainty.
- To limit competition in the market.
Common challenges for cartels:
- Cheating: Members may secretly break the agreement to gain more sales.
- Coordination: It is difficult to manage many different companies.
- New competition: High profits attract new businesses to enter the market.
- Legal risks: Collusion is illegal in most countries.
Impact on consumers:
- Prices are generally higher and the amount of goods produced is lower than in a competitive market.
- This results in inefficiency and reduced choices for consumers.