Collusion in Oligopoly Market

Collusion is motivated by several factors: increased profits, reduced cash flow uncertainty, and improved opportunities to construct barriers to entry.

When collusive agreements are made openly and formally, the firms involved are called a cartel.

Six major factors that affect the chances of successful collusion:

The number and size distribution of sellers.

The similarity of the products.

Cost structure.

Order size and frequency.

The strength and severity of retaliation.

The degree of external competition.

[Practice Problems] Collusion is less likely in a market when:

the product is homogeneous.

companies have similar market shares.

the cost structures of companies are similar.

[Solutions] B

When companies have similar market shares, competitive forces tend to outweigh the benefits of collusion.