A Group of Firms That Have a Formal Agreement


Collusion is more common in industries where relatively few firms operate, fixed costs are high, barriers to entry are high, demand for goods is relatively inelastic, and government regulations are limited. In an oligopoly, companies operate in imperfect competition. Given the fierce price competition created by this sticky bullish demand curve, companies are using off-price competition to generate larger revenues and market shares. Oligopolistic competition can lead to both profound and different results. In some situations, some companies may use restrictive business practices (collusion, market sharing, etc.) to drive up prices and restrict production in the same way as a monopoly. Whenever there is a formal agreement on such an arrangement between companies that are normally in competition with each other, this practice is called an agreement. An excellent example of such a cartel is OPEC, which has a profound impact on the international price of oil. Many industries have been described as oligopolistic, including civil aviation,[22] agricultural pesticides,[22] electricity,[23][24] and platinum group metal mining. [25] In most countries, the telecommunications sector is characterised by an oligopolistic market structure.

[24] [26] Rail freight markets in the European Union are oligopolistic. [27] In the United States, industries that have identified as oligopolistic include food processing[28], funeral homes[29], sugar refining[30], beer[31] and pulp and paper. [32] In other situations, competition between sellers of an oligopoly with relatively low prices and high production can be fierce. This could lead to an effective result approaching perfect competition. Competition in an oligopoly may be greater if there are more firms in an industry than, for example, if the firms were only regionally based and were not in direct competition with each other. With few sellers, each oligopoly is probably aware of the actions of the others. According to game theory, the decisions of one company influence and are therefore influenced by the decisions of other companies. Strategic planning by oligopolies must take into account the likely reactions of other market participants. Barriers to entry include high investment requirements, strong customer loyalty to existing brands, and economies of scale. In developed economies, oligopolies dominate the economy because the perfectly competitive model is of negligible importance to consumers. Oligopolies differ from price holders in that they do not have a supply curve. Instead, they look for the best value for money.

[2] Cartels have an adverse effect on the consumer because their activity is aimed at increasing the price of a product or service in relation to the market price. However, their behavior also has a detrimental effect in other respects. Cartels deter new entrants and act as a barrier to entry. The lack of competition due to price fixing leads to a lack of innovation. Even if oligopolies realize that they would benefit as a group if they acted as a monopoly, each individual oligopoly faces the private temptation to produce only a slightly higher amount and make a slightly higher profit – while relying on other oligopolists to keep their production low and prices high. If at least some oligopolistics give in to this temptation and start producing more, then the market price will fall. A small handful of corporate oligopolies could end up competing so fiercely that not all of them manage to make economic profits – as if they were perfect competitors. This situation is called fierce competition and is illustrated in Figure 1 for Qcc and Pcc. Since Pcc corresponds to the average cost, companies finally reach the break-even point. Oligopolistic companies, as already mentioned, were called “cats in a bag”.

The French detergent manufacturers we mentioned at the beginning of our discussion on oligopolies have chosen to “get comfortable” with each other. The result? A restless and weak relationship. When the Wall Street Journal reported on the case, he wrote: “According to a statement made by a Henkel executive to the Commission [of the French cartel], detergent manufacturers wanted to `limit the intensity of competition between them and clean up the market.` Nevertheless, a price war broke out between them in the early 1990s. During soap managers` meetings, some of which lasted more than four hours, complex pricing structures were established. “A [soap] manager remembered `chaotic` meetings where each party was trying to figure out how the other had circumvented the rules. Like many cartels, the soap cartel collapsed due to the very strong temptation for each member to maximize their own individual profits. The task of public competition policy is to unravel these various realities and to try to promote behaviour that is beneficial to society as a whole and to prevent behaviour that contributes only to the profits of a few large companies without bringing consumers any corresponding advantage. In particular, the Sherman Act prohibits companies from entering into secret agreements that harm other parties and sets the maximum penalty for corporate collusion at $100 million. Drug trafficking organizations, especially in South America, are often referred to as “drug cartels.” These organizations meet the technical definition of agreements. These are loosely related groups that set rules between themselves to control the price and supply of a good, namely illegal drugs.

The problem with law enforcement is finding hard evidence of collusion. Cartels are formal agreements. Since cartel deals prove collusion, they are rare in the United States. Instead, most collusions are tacit, where companies implicitly come to understand that competition is bad for profits. Therefore, the analysis of the welfare of oligopolies is sensitive to the values of the parameters used to define the structure of the market. In particular, the degree of dead weight loss is difficult to measure. The study of product differentiation shows that oligopolies can also lead to excessive differentiation in order to stifle competition. [Citation needed] Collusion is an unethical business practice that harms consumers and is illegal in most jurisdictions. In the United States, commercial collusion is made illegal by the Sherman Act of 1890 (sections 1 and 2) and the Federal Trade Commission (FTC) and the Clayton Antitrust Acts of 1914. Economists have long understood the desire of companies to avoid competition so that they can instead raise the prices they charge and make higher profits. Adam Smith wrote in Wealth of Nations in 1776: “People of the same trade rarely meet, even for happiness and distraction, but the conversation ends in a conspiracy against the public or an invention to raise prices.” Cartels have a negative impact on consumers, as their existence leads to higher prices and low prices. The Organisation for Economic Co-operation and Development (OECD) has made the detection and prosecution of cartels one of its priority policy objectives.

In doing so, it identified four main categories that define the behaviour of cartels: price agreements, production restrictions, market sharing and bid-rigging (collusive bidding). Although in many parts of the world it is illegal for companies to set prices and divide a market, the temptation to make higher profits makes it extremely tempting to defy the law. The Organization of the Petroleum Exporting Countries (OPEC) is the largest cartel in the world. It is a group of 14 oil-producing countries whose task is to coordinate and unify the oil policies of their member countries and to ensure the stabilization of oil markets. OPEC`s activities are legal because U.S. trade laws protect them. An oligopoly (ολιγοπώλιο) (Greek: ὀλίγοι πωλητές “few authorities”) is a form of market in which a market or industry is dominated by a small group of large sellers (oligopolists). Oligopolies can result from various forms of collusion that reduce competition in the market, which usually results in higher prices for consumers. Oligopolies have their own market structure.

[1] Explicit agreements exist when a group of companies enters into a formal agreement on collusive business practices. However, since collusive practices are generally illegal, companies are likely to avoid creating documentation for such an agreement. A contract detailing the terms of the collusion may also be difficult to enforce in court for the same reason. Instead, a formal consultation agreement can be reached orally and in person. How did this soap opera end? Following an investigation, French antitrust authorities fined Colgate-Palmolive, Henkel and Proctor & Gamble a total of 361 million euros ($484 million). A similar fate befell the ice cream makers. Ice packs are a commodity, a perfect replacement, usually sold in 7 or 22 pound bags. No one cares about the label on the bag.

By agreeing to divide the ice cream market, control large geographical areas and set prices, ice cream manufacturers have moved from perfect competition to a monopoly model. According to the agreements, each company was the sole supplier of bag ice cream for a region; there have been long-term and short-term profits. According to the court, “these companies illegally conspired to manipulate the market.” The fines totaled about $600,000 – a hefty fine given that an ice pack is sold for less than $3 in most parts of the United States. Oligopoly is a common form of market in which only a limited number of firms compete on the supply side. As a quantitative description of the oligopoly, the concentration ratio of four companies is often used. This indicator expresses as a percentage the market share of the four largest enterprises in a given sector of the economy. .


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