Imperfect Competition: Tacit Collusion



Imperfect Competition: Tacit Collusion

Introduction

Imperfect competition is the situation of market failure in which, unlike the situation of perfect competition, a single agent operating in the market or a few manipulate the condition of the product and may directly affect the price formation.

In imperfect competition, firms residing in that market can have enough market power to affect the price. The main consequences of this market power can have a negative impact on consumer welfare and efficiency losses. There are numbers of imperfect competition forms such as monopoly where only one seller exist in the market, oligopoly where only few seller exist in the market, Monopolistic competition which comprises of many sellers manufacturing extremely distinguished goods, Monopsony where one buyer of the good exist in the market, Oligopsony where few buyers exist in the market and lastly, Information asymmetry in which one competitor has benefit of more or better information.

In this paper we will cover the market in which where there is imperfect competition and possible tacit collusion.

Discussion

Market Environment Analysis with Tacit Collusion, Including Deterrents from Entry

So far, we have assumed that firms interact once in the market. In reality firms face repeatedly. Mechanisms such as reputation and reprisals can only be analyzed in a repeated interaction model. When there are small numbers of firm in a market, they may decide to cooperate or not cooperate. The companies do not cooperate when they act on their own, without reaching an agreement with other express or implied. Such behavior causes price wars. The companies cooperate in order to minimize competition or trying to reduce the competition. When an oligopoly firms actively cooperate, practice collusion. This term describes a situation in which two or more companies jointly fixed prices or production levels, share the market or take other decisions together (Grossman, 2009).

During the early years of American capitalism, prior to the adoption of effective antitrust laws, the oligopolist used to merge or form trusts or cartels. A cartel is an organization of independent companies that produce similar products and working together to raise prices and restrict output. Today it is absolutely illegal, with few exceptions, in the United States and most other market economies that firms collude together fixing prices or sharing markets.

Evaluate the Profitability of Entering the Market

Profitability is the main thing for which business exist. The profitability of the firm depends on how easily other companies can ...