- Collusion
- Collusion is when firms act together to reduce output and keep prices high, rather than competing with one another.
- Cartel
- A cartel is a group of firms that have a formal agreement to collude to produce the monopoly output and sell at the monopoly price.
Forms of collusion
Can you name the three forms collusion can take?
Each is a way oligopolists hold prices up, and they differ in how much is said out loud.
Overt collusion is a formal agreement between firms, spoken or written, on the prices they will charge, the output each will sell or the markets each will serve.
Can you think of an example?
Rival makers of an animal-feed additive met in hotel conference rooms and agreed exactly how much each would sell and what it would charge. The price doubled while the agreement lasted.
Tacit collusion is when firms implicitly reach an understanding that competition is bad for profits, and hold prices up with no agreement between them.
Can you think of an example?
Three petrol stations at one junction never undercut each other. None has spoken to the others, but each knows that a price cut would be matched within the hour.
Price leadership is when one firm, often the largest, changes its price and the others follow it, so prices move together without any agreement.
Can you think of an example?
The biggest bank in a market raises its mortgage rate, and within a week the other large lenders raise theirs by the same amount.