What is collusion?
When firms cooperate to reduce competition, usually by fixing prices or output
Which market structure is collusion most likely in?
Oligopoly
Why is collusion common in oligopolies?
Few firms and interdependence make coordination easier
What is formal collusion?
Explicit agreements between firms to fix prices or output
What is an example of formal collusion?
Cartels such as OPEC
Is formal collusion legal in the UK?
No, it is illegal under competition law
What is tacit collusion?
Unspoken coordination between firms without formal agreements
Is tacit collusion illegal?
No, but it is monitored by competition authorities
What is a cartel?
A group of firms that formally collude to act like a monopoly
What is the main aim of collusion?
To maximise joint profits
How does collusion affect prices?
Prices are higher
How does collusion affect output?
Output is restricted
How does collusion affect consumer surplus?
Consumer surplus falls
How does collusion affect allocative efficiency?
It causes allocative inefficiency as price exceeds marginal cost
How does collusion affect productive efficiency?
Firms may become productively inefficient
Why is collusion unstable?
Firms have an incentive to cheat
Why do firms cheat in collusion?
To gain market share by lowering prices
How does game theory explain collusion?
Firms may choose to cheat due to individual incentives
What is the Prisoner’s Dilemma?
A model showing why firms fail to collude despite joint benefits
What role do price wars play in collusion?
They act as a punishment for cheating
How can collusion increase dynamic efficiency?
Higher profits can fund research and development
