Collusive Behaiour
Why might price collusion in oligopoly industry occur
Collusion occurs when firm get together and agree on price and output condition.
Oligopolistic industry tend to promote collusion since the number of firm is small and
The firms recognize their interdependence and therefore foresee a lot of advantages such as:
?· Maximize their joint profits as they agree to set a price to charge
?· Decreases the competition which reduces risks of uncertainty
Firms are more likely to agree not to compete on price where the product is fairly standardized .the agreed price is normally well above the average costs of more efficient firms since, in order to persuade enough firms to join the scheme to make it operational, the price must be high enough to provide profits for the less efficient. In order to make the price effective ,a price agreement is usually supported by a complementary agreement to limit output.
Asse s the economic desirability of collusive prices
From the firms prospective (firms in an oligopoly):
Collusive behavior in an oligopoly is desirable for the firms in the oligopoly as the basic problem for a firm in an oligopoly is to try a d predict how the rival firms are going to react .This makes the firms in
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