1
$\begingroup$

I read that collusion between firms in a oligopoly setting make sure that consumers experience higher prices and lower output because the firms start to function as if they are in a monopoly. Is this always the case? Is it possible that output instead increases?

$\endgroup$
0

2 Answers 2

6
$\begingroup$

You would have to define the word collude precisely. An example of legal collusion/cooperation where output increases: In some swimming pools, cinemas, etc. the buffet is run by a different company. Everything else being the same, most people prefer to go to a pool/cinema with a buffet rather than to pool/cinema without one. Thus the buffet contracting to be present is potentially increasing the sales of the other establishment.


In the textbook case of Cournot-oligopoly firms colluding in the market of a normal good where there are no externalities the statement is true.

It is difficult to say "always", as one can usually come up with somewhat special/convoluted scenarios where the outcome is flipped.

E.g., there is a concept called minimum resale price, where the supplier would prohibit the retail store from selling its product under a price X. There are a lot of theoretical models where this is shown to result in higher prices and hence, a loss to the consumer; as a result the practice is prohibited in many places (e.g., EU countries). However, in the past decade models have also shown that such agreements could potentially improve the quality of service to such a degree that the consumer would actually benefit, even if the prices are higher.

So a lot depends on the exact nature of your models. In models with asymmetric information even beliefs about beliefs can play a large role, frustrating forecasters, as these are nigh-on-impossible to measure accurately.

$\endgroup$
-1
$\begingroup$

"Is it possible that output instead increases?". It's possible if some outside agent will reward them for increasing their output. Like maybe USA could convince OPEC to increase their output, in exchange for some kind of political favors, in order to lower profits of Russia from selling oil. I don't say that it's very feasible, but scenario like this seems to be in the realm of possible.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.