Collusion

• What is collusion in the context of firms?

  Collusion is when firms work together.
• What types of agreements may firms reach in collusion?

  Agreements on prices, quotas, and market allocation.
• What are the two types of collusion?

  Tacit and overt/open collusion.
• Why are many forms of open collusion illegal in the UK and EU?

  They violate Competition Law.
• What is the most famous cartel mentioned in the material?

  OPEC (Organisation of Petroleum Exporting Countries).
• What makes tacit collusion difficult to prove?

  There is usually no formal agreement in place.
• What conditions make collusion more likely to succeed?

  Few firms, similar production methods, and stable markets.
• What must be controlled for collusion to succeed?

  Supply must be controlled without cheating.
• What is the impact of new substitutes on collusion?

  New substitutes can disrupt collusion agreements.
• How does the CMA's approach to fines affect collusion?

  Low fines may encourage collusion among firms.
• How does the relative price of substitutes affect collusion success?

  Higher substitute prices may weaken collusion.
• Why might a cartel be more successful in the short run?

  Alternatives may develop and become available over time.
• What is the incentive to cheat within a cartel?

  To gain more profit by undercutting prices.
• What happens if all firms in a cartel cheat?

  Excess supply leads to a sharp price fall.
• What is a cartel and how does it operate?

  • A cartel is a formal collusive agreement.
  • Firms control market supply and prices.
  • Aim to jointly maximize profits.
  • Often involves market sharing.
• What is price leadership in an oligopoly?

  Price leadership is when a dominant firm sets prices.
• What is price fixing in the context of a cartel?

  Agreeing to charge the same price to increase revenues.
• How do cartels share markets?

  By dividing markets geographically or demographically.
• What is bid-rigging in the context of collusion?

  Discussing bids to keep prices artificially high.
• What is the temptation for individual oligopolists within a cartel?

  To cheat by cutting prices or exceeding quotas.
• What is the dead-weight loss of welfare for consumers due to price fixing?

  Consumers face higher prices and lower output.
• How can price fixing be inequitable for low-income consumers?

  Higher prices may force them out of the market.
• What potential benefits can arise from price fixing for consumers?

  Higher profits may lead to R&D investment.
• How can collusion bring economic benefits to consumers?

  It creates a uniform market structure with predictable prices.
• What is the impact of collusion on advertising costs?

  Reduces need for advertising, saving costs.
• How does cooperation in R&D benefit firms in a cartel?

  Joint investment reduces production costs and fosters innovation.
• What did economist Baumol argue about oligopolies?

  They can improve productive efficiency more than others.