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Micro Economics
Micro Economics
Graph G-MIC4.2
A perfectly competitive firm is presumed to produce the
quantity of output that minimizes economic losses, if price is
greater than average variable cost but less than average total
cost. This is one of three short-run production alternatives facing
a firm. The other two are profit maximization (if price exceeds
average total cost) and shutdown (if price is less than average
variable cost).
A perfectly competitive firm guided by the pursuit of
profit is inclined to produce the quantity of output that equates
marginal revenue and marginal cost in the short run, even if it is
incurring an economic loss. The key to this loss minimization
production decision is a comparison of the loss incurred from
producing with the loss incurred from not producing. If price
exceeds average variable cost, then the firm incurs a smaller loss
by producing than by not producing.
ONE OF THREE ALTERNATIVES Production Alternatives
Loss minimization is one of three short-run production
alternatives facing a perfectly competitive firm. All three are Price and Cost Result
displayed in the table to the right. The other two are profit
maximization and shutdown. P > ATC Profit Maximization
With profit maximization, price exceeds average total cost ATC > P >
at the quantity that equates marginal revenue and marginal cost. AVC Loss Minimization
In this case, the firm generates an economic profit.
With shutdown, price is less than average variable cost at P < AVC Shutdown
the quantity that equates marginal revenue and marginal cost. In
this case, the firm incurs a smaller loss by producing no output and incurring a loss equal to total fixed cost.
PERFECT COMPETITION, SHORT-RUN SUPPLY CURVE:
A perfectly competitive firm's supply curve is that portion of its marginal cost curve that lies above the
minimum of the average variable cost curve. A perfectly competitive firm maximizes profit by producing the
quantity of output that equates price and marginal cost. As such, the firm moves along its positively-sloped
marginal cost curve in response to changing prices.
A perfectly competitive firm maximizes profit by producing the quantity of output that equates marginal
revenue and marginal cost. In that price equals marginal revenue for a perfectly competitive firm, price is also
equal to marginal cost. In other words, the firm produces by moving up and down along its marginal cost curve.
The marginal cost curve is thus the perfectly competitive firm's supply curve.
Because the marginal cost curve is positively sloped due to the law of diminishing marginal returns, so too is
the firm's supply curve. And because all firms in a perfectly competitive industry have positively-sloped
marginal cost curves, the market supply curve for the entire industry is also positively sloped. This offers a
prime explanation for the law of supply.
INSIGHT INTO SUPPLY
The analysis of the short-run production decisions for a perfectly competitive firm has direct
implications for the market supply curve and the law of supply. The primary conclusion is that a perfectly
competitive firm's short-run supply curve is that segment of its marginal cost curve that lies above the average
variable cost curve.
A perfectly competitive firm produces the quantity of output that equates marginal revenue, which is
equal to price, and marginal cost, as long as price exceeds average variable cost.
Consider three key points:
A profit-maximizing firm produces the quantity of output that equates marginal revenue and marginal
cost (MR = MC).
A perfectly competitive firm is characterized by the equality between price and marginal revenue (P =
MR).
The law of diminishing marginal returns gives the marginal cost curve a positive slope.
Combining all three points means that a profit-maximizing perfectly competitive firm produces the quantity of
output that equates price and marginal cost (P = MC).
An increase in the price, moves the profit-maximizing quantity to a higher point on the positively-sloped
marginal cost curve, and a larger production quantity.
A decrease in the price, moves the profit-maximizing quantity to a lower point on the positively-sloped
marginal cost curve, and a smaller production quantity.
Working a Graph
DEMAND FOR
PRODUCT DECREASES
Market demand shift to left, causing the market price to decrease As price decreases, existing firms begin losing
money Over time, as cost commitments end, the least efficient firms exits the industry, decreasing market
supply and driving market price up to the long run equilibrium.
MARGINAL REVENUE MARGINAL COST
MARGINAL REVENUE, PERFECT COMPETITION
The change in total revenue resulting from a change in quantity of output sold. Marginal revenue
indicates how much extra revenue a perfectly competitive firm receives for selling an extra unit of output.
Because a perfectly competitive firm is a price taker and faces a horizontal demand curve, its marginal
revenue curve is also horizontal and coincides with its average revenue
(and demand) curve. A perfectly competitive firm maximizes profit by producing the quantity of output found
at the intersection of the marginal revenue curve and the marginal cost curve.
Marginal revenue is the extra revenue generated when a perfectly competitive firm sells one more unit
of output. It plays a key role in the profit-maximizing decision of a perfectly competitive firm relative to
marginal cost. A perfectly competitive firm maximizes profit by equating marginal revenue, the extra revenue
generated from production. If these two are not equal, then profit can be increased by producing more or less
output.
The relation between marginal revenue and the quantity of output produced depends on market
structure. For a perfectly competitive firm, marginal revenue is equal to price and average revenue, all three of
which are constant.
Marginal revenue can be represented in a table or as a curve. For a perfectly competitive firm, the
marginal revenue curve is a horizontal or perfectly elastic.
Marginal revenue received by a firm is the change in total revenue divided by the change in quantity,
often expressed as this simple equation:
Marginal revenue = ∆𝑻𝑹/∆𝑸
MARGINAL REVENUE CURVE, PERFECT COMPETITION
A curve that graphically represents the relation between the marginal revenue received by a perfectly
competitive firm for selling its output and the quantity of output sold.
REVENUE OF A COMPETITIVE FIRM
For competitive firm, the price it receives does not depend on the quantity it chooses to sell. Marginal
Revenue equals the price of its output.
For example, if the price is P280, then the total revenue of selling 10 units is P2,800 and the total
revenue of selling 11 units is P3,080. Marginal revenue, ∆TR/∆𝑄= (3,080-2800)/(11-10)= P280.
MARGINAL COST, PERFECT COMPETITION
The increase in cost that companies a unit increase in output; the partial derivative of the cost function
with respect to output. Additional cost associated with producing one more unit of output.
THE MARGINAL COST CURVE AND THE FIRMS SUPPLY DECISION
When marginal revenue (price)>marginal cost, the firm increases profits by producing one more unit.
When marginal revenue (price)<marginal cost, the firm increases profis producing one less unit.
A competitive firm can only be maximizing profits when price = marginal cost.
Because the firm’s marginal cost curve determines how much the firm is willing to supply at any price,
it is competitive firm’s supply curve.
One qualification: instead of choosing the optimal production, the firm might want to shut down and
produce zero.
MARGINAL REVENUE MARGINAL COST RULE
Marginal revenue equals marginal cost rule is applicable to loss maximization as well as profit
maximization. However, if marginal revenue intersects marginal cost below average variable cost, it means that
revenues are not sufficient to cover the fixed costs and the firm should close down.
Marginal revenue means the addition made to the total revenue by producing and selling an additional
output unit and marginal cost means the addition made to the total cost by producing an additional unit of
output. Now a firm will go on expanding this level of output so long and extra unit of output adds more to
revenue than to cost, since it will be profitable to do so. The firm will not produce an additional unit of the
product which adds more to cost than to revenue because to produce that unit will means losses. In other words,
it will pay the firm to go on producing additional unit of output so long as the marginal revenue exceeds
marginal cost. The firm will be increasing its total profits by increasing its output to the level at which marginal
revenue just equals marginal cost. It will not be profitable for the firm to produce a unit of output of which
marginal cost is greater than the marginal revenue.
The firm will be making maximum profit by expanding output to the level where marginal revenue is
equal to marginal cost. If it goes beyond the point of equality between marginal revenue and marginal cost, it
will be incurring losses on the extra units of output and therefor will be reducing its total profit. Thus the firm
will be in equilibrium position when it is producing the amount of output at which marginal revenue equals
marginal cost.
MR = MC = Market Price
QUIZ
1. Because the perfectly competitive firm is a price-taker, it’s demand curve is
a) Upward sloping c) Horizontal
b) Downward sloping d) Vertical
2. In order to maximize profit, the firm should produce where
a) Marginal Revenue = Price c) Marginal Cost = Average Variable
b) Marginal Cost = Marginal Cost
Revenue d) Price = Average Variable Cost
3. At long run equilibrium for the perfectly competitive firm, the marginal cost is equal to
all of the following except
a) Average total cost c) Price
b) Average Variable Cost d) Marginal Revenue
4. If a firm incurs losses, it should continue to produce as long as the price covers the
a) Average variable cost c) Average total cost
b) Average fixed cost d) Marginal Cost
5. If a perfectly competitive firm is initially in long run equilibrium and the firm’s variable
cost increases, all of the following occur in the short run except
a) The firm’s average total cost will c) The firm’s average fixed cost will
increase increase
b) The firm’s marginal cost will d) The firm’s output will decrease
increase
6. In a perfectly competitive industry in which firms are achieving short-run economic
profit,
a) Firms will enter the industry c) Industry output will decrease
b) Firms will increase the product price d) Firms will exit the industry
7. Productive efficiency occurs when the firm produces at the lowest cost per product. This
occurs at the minimum Average total cost, where
a) Marginal Cost = Price d) Marginal Revenue = Average total
b) Marginal Revenue = Price cost
c) Marginal Cost = Average total cost
8. Allocative efficiency is attained when
a) Marginal Cost = Price c) Marginal Cost = Average total cost
b) Marginal Revenue = Price
d) Marginal Revenue = Average total cost
9. Is a term that describes a market that has a broad range of competitors who are selling
identical products and can easily enter and exit the industry.
a) Monopolistic Competition c) Perfect Competition
b) Imperfect Competition d) Monopoly
10 – 11 Give 2 key characteristics of a perfectly competitive firm (Any of the following answers)
A large number of small firms Perfect resource mobility or the freedom of
Identical products sold by all firms entry into and exit out of the industry
Perfect knowledge of prices and technology
12 – 13 Give 2 advantages of a perfectly competitive firm (Any of the following answers)
Optimal allocation of resources Responsive to consumer wishes: Change in
Competition encourages efficiency demand, leads extra supply
Consumers charged at a lower price
14 – 15 Give 2 disadvantages of a perfectly competitive firm (Any of the following answers)
Insufficient profits for investment Unequal distribution of goods and income
Lack of competition over product design and Externalities
specification
MONOPOLY
-(from Greek mónos ("alone" or "single") and pōleîn ("to sell") exists when a specific
person or enterprise is the only supplier of a particular commodity (this contrasts with
a monopsony which relates to a single entity's control of a market to purchase a good or service,
and with oligopoly which consists of a few entities dominating an industry).
ORIGIN
The term "monopoly" first appears in Aristotle's Politics. Aristotle describes Thales of
Miletus's cornering of the market in olive presses as a monopoly.
TERMS USED
Monopolize refers to the process by which a company gains the ability to raise prices and
exclude competitors. In economics, a monopoly is a single seller. In law, a monopoly is a
business entity that has significant market power, that is, the power to charge overly high
prices. Although monopolies may be big businesses, size is not a characteristic of a monopoly. A
small business may still have the power to raise prices in a small industry or market.
Monopolies are thus characterized by a lack of economic competition to produce
the good or service, a lack of viable substitute goods, and the possibility of a high monopoly
price well above the firm's marginal cost that leads to a high monopoly profit.
Market power is the ability to increase the product's price above marginal cost without
losing all customers. Although a monopoly's market power is great it is still limited by the
demand side of the market. A monopoly has a negatively sloped demand curve, not a perfectly
inelastic curve. Consequently, any price increase will result in the loss of some customers.
Government-granted monopoly or legal monopoly is sanctioned by the state, often to
provide an incentive to invest in a risky venture or enrich a domestic interest
group. Patents, copyrights, and trademarks are sometimes used as examples of government-
granted monopolies. The government may also reserve the venture for itself, thus forming
a government monopoly.
Characteristics of a MONOPOLY:
Profit Maximizer: Maximizes profits.
Price Maker: Decides the price of the good or product to be sold, but does so by
determining the quantity in order to demand the price desired by the firm.
High Barriers: Other sellers are unable to enter the market of the monopoly.
Single seller: In a monopoly, there is one seller of the good that produces all the
output.] Therefore, the whole market is being served by a single company, and for
practical purposes, the company is the same as the industry.
Price Discrimination: A monopolist can change the price and quality of the product. He
or she sells higher quantities, charging a lower price for the product, in a very elastic
market and sells lower quantities, charging a higher price, in a less elastic market.
The characteristics of a monopoly market:
Sellers are price makers – as there is only one seller in the market, it can influence the
market price by its own production decisions. If the market demand curve is downward
sloping then the monopoly firm faces the same demand curve, the price falls as the
amount of output sold rises. So the firm can increase the market price by selling less.
Buyers are price takers – each buyer is sufficiently small in relation to the overall
market that they can’t influence the market price by the amount they consume.
Sellers do not engage in strategic behaviour – when a firm makes its own output
decisions, it does not take into consideration the response of other firms – because there
aren’t any.
No new firms can enter the market – the monopoly firm faces no threat of entry from
potential rivals. When you have a market that has only one firm producing, but the firm is
producing at a lower price than you would expect it to, this could suggest that it is fearful
of rivals entering and so is trying to deter entry through keeping the price down.
Sometimes you will have a situation where there appears to be only one firm in the
market, but it is not really a monopoly – the threat of entry will erode its market power.
In order for these four characteristics to be present, you will usually need to have:
A large number of buyers but only one seller – so that the first two assumptions hold
Goods that are not substitutable – if a firm produces goods that consumers can easily
switch away from in favour of alternative goods in a different market, then it doesn’t
have monopoly power because it is effectively competing with the firms in that other
market.
Buyers must have full information – buyers have to be aware of the price and the
characteristics of the monopolist’s product in order to make decisions of whether to buy it
at the asking price
Effective barriers to entry – these could be legal (requiring a licence to enter) or
because of control of key inputs, you can easily have a monopoly railway company
because if it controls the rail network, nobody is likely to build a new railway to compete.
FORMATION OF MONOPOLIES
Monopolies can form for a variety of reasons, including the following:
If a firm has exclusive ownership of a scarce resource, such as Microsoft owning
the Windows operating system brand, it has monopoly power over this resource and is the only
firm that can exploit it.
Governments may grant a firm monopoly status, such as with the Post Office, which was
given monopoly status by Oliver Cromwell in 1654. The Royal Mail Group finally lost its
monopoly status in 2006, when the market was opened up to competition.
Producers may have patents over designs, or copyright over ideas, characters, images,
sounds or names, giving them exclusive rights to sell a good or service, such as a song writer
having a monopoly over their own material.
A monopoly could be created following the merger of two or more firms. Given that this
will reduce competition, such mergers are subject to close regulation and may be prevented if the
two firms gain a combined market share of 25% or more.
Sources of monopoly power
Monopolies derive their market power from barriers to entry – circumstances that prevent
or greatly impede a potential competitor's ability to compete in a market. There are three major
types of barriers to entry: economic, legal and deliberate.
Economic barriers - Economic barriers include economies of scale, capital requirements, cost
advantages and technological superiority.
Economies of scale - Monopolies are characterized by decreasing costs for a relatively
large range of production. Decreasing costs coupled with large initial costs give
monopolies an advantage over would-be competitors. Monopolies are often in a position
to reduce prices below a new entrant's operating costs and thereby prevent them from
continuing to compete. Furthermore, the size of the industry relative to the minimum
efficient scale may limit the number of companies that can effectively compete within the
industry. If for example the industry is large enough to support one company of minimum
efficient scale then other companies entering the industry will operate at a size that is less
than MES, meaning that these companies cannot produce at an average cost that is
competitive with the dominant company. Finally, if long-term average cost is constantly
decreasing, the least cost method to provide a good or service is by a single company.
Capital requirements - Production processes that require large investments of capital, or
large research and development costs or substantial sunk costs limit the number of
companies in an industry. Large fixed costs also make it difficult for a small company to
enter an industry and expand.
Technological superiority - A monopoly may be better able to acquire, integrate and use
the best possible technology in producing its goods while entrants do not have the size or
finances to use the best available technology. One large company can sometimes produce
goods cheaper than several small companies.
No substitute goods - A monopoly sells a good for which there is no close substitute. The
absence of substitutes makes the demand for the good relatively inelastic enabling monopolies to
extract positive profits.
Control of natural resources - A prime source of monopoly power is the control of resources
that are critical to the production of a final good.
Network externalities - The use of a product by a person can affect the value of that product to
other people. This is the network effect. There is a direct relationship between the proportion of
people using a product and the demand for that product. In other words, the more people who are
using a product the greater the probability of any individual starting to use the product. This
effect accounts for fads, fashion trends, social networks etc. It also can play a crucial role in the
development or acquisition of market power. The most famous current example is the market
dominance of the Microsoft office suite and operating system in personal computers.
Network externalities - The use of a product by a person can affect the value of that product to
other people. This is the network effect. There is a direct relationship between the proportion of
people using a product and the demand for that product. In other words, the more people who are
using a product the greater the probability of any individual starting to use the product. This
effect accounts for fads, fashion trends, social networks etc. It also can play a crucial role in the
development or acquisition of market power. The most famous current example is the market
dominance of the Microsoft office suite and operating system in personal computers.
Legal barriers - Legal rights can provide opportunity to monopolise the market of a good.
Intellectual property rights, including patents and copyrights, give a monopolist exclusive control
of the production and selling of certain goods. Property rights may give a company exclusive
control of the materials necessary to produce a good.
Deliberate actions - A company wanting to monopolise a market may engage in various types
of deliberate action to exclude competitors or eliminate competition. Such actions include
collusion, lobbying governmental authorities, and force
In addition to barriers to entry and competition, barriers to exit may be a source of market
power. Barriers to exit are market conditions that make it difficult or expensive for a company to
end its involvement with a market. Great liquidation costs are a primary barrier for
exiting. Market exit and shutdown are separate events. The decision whether to shut down or
operate is not affected by exit barriers. A company will shut down if price falls below minimum
average variable costs.
MONOPOLY VERSUS COMPETITIVE MARKETS
While monopoly and perfect competition mark the extremes of market structures there is
some similarity. The cost functions are the same. Both monopolies and perfectly competitive
(PC) companies minimize cost and maximize profit. The shutdown decisions are the same. Both
are assumed to have perfectly competitive factors markets. There are distinctions, some of the
more important of which are as follows:
1. Marginal revenue and price - In a perfectly competitive market, price equals marginal
cost. In a monopolistic market, however, price is set above marginal cost.
2. Product differentiation - There is zero product differentiation in a perfectly competitive
market. Every product is perfectly homogeneous and a perfect substitute for any other.
With a monopoly, there is great to absolute product differentiation in the sense that there
is no available substitute for a monopolized good. The monopolist is the sole supplier of
the good in question. A customer either buys from the monopolizing entity on its terms or
does without.
3. Numbers of competitors - PC markets are populated by an infinite number of buyers
and sellers. Monopoly involves a single seller.
4. Barriers to Entry - Barriers to entry are factors and circumstances that prevent entry into
market by would-be competitors and limit new companies from operating and expanding
within the market. PC markets have free entry and exit. There are no barriers to entry, or
exit competition. Monopolies have relatively high barriers to entry. The barriers must be
strong enough to prevent or discourage any potential competitor from entering the
market.
5. Elasticity of Demand - The price elasticity of demand is the percentage change of
demand caused by a one percent change of relative price. A successful monopoly would
have a relatively inelastic demand curve. A low coefficient of elasticity is indicative of
effective barriers to entry. A PC company has a perfectly elastic demand curve. The
coefficient of elasticity for a perfectly competitive demand curve is infinite.
6. Excess Profits - Excess or positive profits are profit more than the normal expected
return on investment. A PC company can make excess profits in the short term but excess
profits attract competitors, which can enter the market freely and decrease prices,
eventually reducing excess profits to zero. A monopoly can preserve excess profits
because barriers to entry prevent competitors from entering the market.
7. Profit Maximization - A monopoly is presumed to produce the quantity of output that
maximizes economic profit--the difference between total revenue and total cost. This
production decision can be analyzed directly with economic profit, by identifying the
greatest difference between total revenue and total cost, or by the equality between
marginal revenue and marginal cost.
The profit-maximizing level of output is a production level that achieves the greatest level of
economic profit given existing market conditions and production cost. For a monopoly, this
entails adjusting the price and corresponding production level to achieve the desired match
between total revenue and total cost.
The monopolist's profit maximizing level of output is found by equating its marginal revenue
with its marginal cost, which is the same profit maximizing condition that a perfectly
competitive firm uses to determine its equilibrium level of output. Indeed, the condition that
marginal revenue equal marginal cost is used to determine the profit maximizing level of output
of every firm, regardless of the market structure in which the firm is operating.
The profit-maximizing condition of a monopolistic firm is:
MR = MC
If MR > MC, the monopoly can increase profit by increasing output
If MR < MC, the monopoly can increase profit by decreasing its output
TR-TC= PROFIT
PROFIT MAXIMIZATION: GRAPHS
Profit Curve Total Curves Marginal Curves
MONOPOLISTIC COMPETITION
The model of monopolistic competition describes a common market structure in which
firms have many competitors, but each one sells a slightly different product. Monopolistic
competition as a market structure was first identified in the 1930s by American economist
Edward Chamberlin, and English economist Joan Robinson.
Monopolistic competition is a market structure characterized by a large number of
relatively small firms. While the goods produced by the firms in the industry are similar, slight
differences often exist. As such, firms operating in monopolistic competition are extremely
competitive but each has a small degree of market control.
Monopolistic Competition is a form of imperfect completion. It can be found in many
real world markets raging from clusters of sandwich bars, other fast food shops and coffee stores
in a busy town centre to pizza delivery businesses in a city or hairdressers in a local area.
Monopolistic competition is something of a hybrid between perfect
competition and monopoly. Comparable to perfect competition, monopolistic competition
contains a large number of extremely competitive firms. However, comparable to monopoly,
each firm has market control and faces a negatively-sloped demand curve.
EXAMPLES OF MONOPOLISTIC COMPETITION
The first one is of course the example of clothing. Even if we take any specific item of
clothing, such as a simple shirt, then we will see that there are several producers and almost the
entire world population as consumers. The goods produced, though not congruent, tend to have
similarities in them.
Among all the examples of monopolistic competition, this one is also universally applicable.
Simply put, all the restaurants that serve burgers, or for that matter, any kind of food. There is
similarity but no congruence.
Another prominent and classic example, is stationery manufacturers. They produce the
same thing, but there is no congruence.
A very nice example for monopolistic competition is farmers. Farmers produce crops for
the entire world population, but again, they have different characteristics by virtue of things like
size and quality.
6. Limit pricing. The incumbent firm sets a low price, and a high output, so that entrants
cannot make a profit at that price.
7. Superior knowledge. An incumbent may, over time, have built up a superior level of
knowledge of the market, its customers, and its production costs. This superior
knowledge can deter entrants into the market.
8. Predatory acquisition. Predatory acquisition involves taking-over a potential rival by
purchasing sufficient shares to gain a controlling interest, or by a complete buy-out.
9. Advertising. The more that is spent by incumbent firms the greater the deterrent to new
entrants.
10. A strong brand. Brand creates loyalty, ‘locks in’ existing customers, and deters entry.
11. Loyalty schemes. It helps oligopolists retain customer loyalty and deter entrants who
need to gain market share.
THE ADVANTAGES OF OLIGOPOLIES
Oligopolies may adopt a highly competitive strategy, in which case they can generate
similar benefits to more competitive market structures, such as lower prices
Oligopolists may be dynamically efficient in terms of innovation and new product and
process development. The super-normal profits they generate may be used to innovate, in
which case the consumer may gain.
Price stability may bring advantages to consumers and the macro-economy because it
helps consumers plan ahead and stabilizes their expenditure, which may help stabilize the
trade cycle.
THE DISADVANTAGES OF OLIGOPOLIES
High concentration reduces consumer choice.
Cartel-like behavior reduces competition and can lead to higher prices and reduced
output.
Firms can be prevented from entering a market because of deliberate barriers to entry.
There is a potential loss of economic welfare.
Oligopolists may be allocatively and productively inefficient.
TYPES OF OLIGOPOLY:
1. Pure or Perfect Oligopoly: If the firms produce homogeneous products, then it is called pure
or perfect oligopoly. Though, it is rare to find pure oligopoly situation, yet, cement, steel,
aluminum and chemicals producing industries approach pure oligopoly.
2. Imperfect or Differentiated Oligopoly: If the firms produce differentiated products, then it is
called differentiated or imperfect oligopoly. For example, passenger cars, cigarettes or soft
drinks. The goods produced by different firms have their own distinguishing characteristics, yet
all of them are close substitutes of each other.
3. Collusive Oligopoly: If the firms cooperate with each other in determining price or output or
both, it is called collusive oligopoly or cooperative oligopoly.
4. Non-collusive Oligopoly: If firms in an oligopoly market compete with each other, it is called
a non-collusive or non-cooperative oligopoly.
COLLUSIVE OLIGOPOLIES
Another key feature of oligopolistic markets is that firms may attempt to collude, rather
than compete. It is a common practice among oligopolist, it is a secret agreement among them to
have a common price and to manipulate their output for their own interest.
TYPES OF COLLUSION
1. Overt. It occurs when there is no attempt to hide agreements, such as the when firms
form trade associations like the Association of Petrol Retailers.
(These are illegal collusions)
Price fixing is an agreement to increase, fix or maintain the price
Market Division is agreement in which competitors divide the market among themselves.
Bid Rigging
GRAPH FOR OVERT COLLUSION (As you can see firms can have moving up demand
curve)
2. Covert. Occurs when firms try to hide the
results of their collusion, usually to avoid
detection by regulators, such as when fixing
prices.
3. Tacit. Arises when firms act together,
called acting in concert, but where there is no
formal or even informal agreement.
4. Price Leadership it is a collusion in which
firms in the industry follows the price changes
made by a firm recognized “price leader”