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Why are successful collusive oligopolies rather short-lived?

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yaga49 | (Level 1) Valedictorian

Posted June 2, 2013 at 3:03 PM via web

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Why are successful collusive oligopolies rather short-lived?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted June 2, 2013 at 3:28 PM (Answer #1)

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Successful collusive oligopolies do not generally last very long because there is too much incentive for one or more members of the oligopoly to cheat on the deal that they have made in collusion with one another.

In an oligopoly, there are only a few very large companies, each with a large degree of market share.  This means that each company has to respond to the actions of the other companies to remain competitive.  Firms in an oligopoly often want to collude so that they can keep prices high.  If they have an informal agreement to keep the quantity supplied low and the price high, they can make higher profits than if they were to actually compete.

When firms collude, though, each firm has a major incentive to cheat.  Let us imagine that firms A, B, and C are colluding to keep prices high.  Now, think about what happens if Company A lowers its prices.  The other two firms continue to keep their prices high.  This means that consumers will flock to Company A.  It will probably be able to get much more market share until the other companies react by lowering their own prices.

Whenever firms collude, there is an incentive to cheat.  Therefore, it is rare for collusive oligopolies to last very long.

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