Collusion is when two or more firms conspire and act together in order to restrict the competition. Oligopolies are driven by the goals of profit and there is mutual interdependence among the firms. So, some firms are tempted to collude and decide on a joint action such as in pricing.
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As mentioned earlier, firms collude to increase their profits by synchronizing their actions with other firms in setting prices, constraining output and increasing the demand and other underhand activities. Moreover, collusion also lessens the uncertainties that the firms could face in the market and enhances their chances of achieving higher profits.
It is possible that the consequences of collusion can be simply the increase in the mark up prices and scarcity of the commodity in the market because of deliberate underproduction. Both these ultimately affect the consumer due to the disproportion in the distribution of resources.
In a collusion oligopoly, the equilibrium price and quantity are determined relative to the intersection of the marginal revenue curve that is derived from the market demand curve and the horizontal sum of the short-run marginal cost curves.
The comparative costs and sales factors in the different firms that are part of the collusion oligopoly determine the allocation of their profit share and their quantum of bargaining power that results from them. For instance, the firms that have greater bargaining power because of the lowest costs and largest output potential get the largest profits. In the same way, the sales may hinge on the consumer preference, especially if there is product differentiation among the colluding firms.
As collusion oligopolies are detrimental to the consumer, it is reassuring to observe that the majority of collusion oligopolies do not last long. There are two main reasons for this: Collusion is considered illegal under the antitrust laws of many countries. Secondly, the firms that collude have to restrain their output to maximise profits and this cannot continue for very long and the firms will have a temptation to renege on their agreement with the other firms and indulge in increased production and cutting of prices in order to attract more and newer customers and increase their sales and profits.
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