MODULE 66 : OLIGOPOLY IN PRACTICE

AVRIL GENAO CERDA

CHECK YOUR UNDERSTANDING

1. For each of the following industry practices, explain whether the practice supports the conclusion
that there is tacit collusion in this industry.
a. For many years, the price in the industry has changed infrequently, and all the rms in the
industry charge the same price. The largest rm publishes a catalog containing a “suggested”
retail price. Changes in price coincide with changes in the catalog —> There is tacit collusion
in the industry. Like the book says “price leadership is when one rm sets its price rst, and
other rms then follow” and that is what could be seen here. The largest rm puts up a
suggested price and coincidentally (not ;)) other rms follow what they are likely to do.

b. There has been considerable variation in the market shares of the rms in the industry over
time —> There is no tacit collusion since most likely each rm is competing against each
other.

c. Firms in the industry build into their products unnecessary features that make it hard for
consumers to switch from one company’s products to another’s —> There is no tacit collusion
since rms are using product differentiation to convince buyers on the differences that their
products have so they dont switch to a different rm and separate themselves enough from
other rms.

d. Firms meet yearly to discuss their annual sales forecasts —> There is evidence of tacit
collusion because by “meeting up” they can strategically create a plan to raise prices to raise
each other’s pro t, even by making most likely a cartel.

e. Firms tend to adjust their prices upward at the same times —> There is most likely tacit
collusion because they are raising their prices all together making sure to not gain less their
competitors.

MULTIPLE CHOICE QUESTIONS

1. Having which of the following makes it easier for oligopolies to coordinate on raising prices?
a. a large number of rms
b. differentiated products
c. buyers with bargaining power
d. identical perceptions of fairness: pretty much by process of elimination due to the
fact the 4 factors that make it dif cult for rms to coordinate on raising prices are large
numbers, complex products and pricing schemes, difference in interests and bargaining
power of buyers
e. complex pricing schemes

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 2. Which of the following led to the passage of the rst antitrust laws?
I. growth of the railroad industry
II. the emergence of the Standard Oil Company
III. increased competition in agricultural industries
a. I only
b. II only
c. III only
d. I and II only: The antitrust policy came to be laws involving the government to prevent
oligopolistic industries of acting or switching to monopolies thanks to the legal framework
behind it. Oligopolies became an issue at rst when there seemed to be a growth of railroads
which created a national market for many goods. Firms started creating cartels to earn higher
pro ts which was legal at the time. They started violating agreements due to the temptations
of producing more pro t than the rest. When the Standard Oil Company emerged, one lawyer
came up with a trust. This merced companies into one single rm to be like a monopoly but
soon enough, many disliked it which resulted in the creation of the antitrust laws.
e. I, II, and III

3. When was the rst federal legislation against cartels passed?

a. 1776
b. 1800
c. 1890: this was the year where the rst legislation was passed making them ilegal due to the
actions that came from the rise of many rms’s pro ts.
d. 1900
e. 1980

4. Which of the following industries has been prosecuted for creating an illegal cartel?
a. the lysine industry
b. the art auction house industry
c. the U.S. electrical equipment industry
d. the bulk vitamin industry
e. all of the above: The lysine industry was prosecuted for price xing, therefore agreeing to
raise their pro ts by setting prices super high. The art auction house industry creates
aggressive price competition amounts to a price war. The US electrical equipment industry is
also an example of price xing where executives met secretly and illegally to decide who
would bid what price for which contract. Lastly, the bulk vitamin industry which revealed a
cartel in order to get favorable treatment from U.S. regulators.

5. Oligopolists engage in tacit collusion in order to

a. raise prices: “When rms limit production and raise prices to raise each other’s pro ts”
b. increase output.
c. share pro ts.
d. increase market share.
e. all of the above.
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 FREE RESPONSE QUESTIONS

1. Like other rms, universities face temptations to collude in order to limit the effects of competition
and avoid price wars. (In fact, the U.S. Department of Justice formally accused a group of universities
of price- xing in 1991.) Answer the following questions about behavior in the market for higher
education.
a. Describe one factor of the market for higher education that invites tacit collusion
- Different Career Programs

b. Describe one factor of the market for higher education that works against tacit collusion.
- Large Numbers; in this case, the amount of universities in the US (like 1,200 something)

c. Explain one way in which universities could engage in illegal collusion.

- Other departments limiting the amount of applicants that want to go into their program to
try to match others

d. What are three ways in which universities engage in product differentiation?

- Class size
- College merchandise
- Study abroad programs

e. Explain how price leadership might work in the university setting.

- When universities go and announce their requirements to apply so others follow and do
the same

f. What forms of nonprice competition do you see universities engaged in?

- New facilites
- Renovated Dorms

2. List four factors that make it dif cult for rms to form a cartel. Explain each.
- Large Numbers: makes keeping track of price and output levels harder since the more
rms there are, the less they will want to cooperate with each other
- Complex Products and Pricing Schemes: when there is a large number of rms, keeping
track of what everyone else is doing becomes very dif cult
- Differences in Interests: they have different desires for their rm and even if they could agree
on market shares, they would still nd something to disagree on that would stop them from
cooperating together
- Bargaining Power of Buyers: the more their buyers have bargaining power, the less they can
manipulate any actions like the raise in prices


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