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Economics explained


Market structures

Cooperation and collusion between oligopolists

Cooperation and collusion between oligopolists

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In industries where only a few firms operate, the firms have a choice about whether to compete or co-operate.

These two strategies, compete or collude, lead to hugely different outcomes for both producers and consumers:

For producers, collusion is better than competition because it leads to profits that last as long as the firms keep colluding.

For consumers, collusion is worse than competition because it leads to higher prices and lower output.

Collusion is an anti-competitive action by producers.

Informal or tacit collusion is not illegal and usually takes the form of price leadership, where firms automatically follow the lead of one of the group.

The objective is to maximise the profits of the whole group by acting as a single monopolist. The price leader is invariably the dominant firm and has sufficient market power to determine a price change that other firms follow. On the other hand, a cartel is a formal price or output agreement between firms in an industry to restrict competition. This is illegal.

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