Collusion of firms (esp relevant in oligopoly)

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  • Collusion
    • BAD
      • Cartels
      • Price rings
      • Disadv of monopoly and no econ of scale because not colluding technologically or pooling physical resources. therefore bad for econ welfare
    • GOOD
      • Joint product development
        • Economically efficient because less resources wasted cheaper to do it together etc. Benefits both firms therefore ok
      • Joint training schemes
    • LONG TERM: Could cause CPI and if protected by govt especially bad because certain industries may never move past inefficiency which can cause structural problems for the econ later, even make some industries obsolete
    • SHORT TERM: Consumers are worse off and are actually in a monopoly situation.  Other producers who need stuff the cartel produces are also suffering higher CoP. Inefficient firms may stay in business which means that once cartel breaks up there may be 'zombie' businesses wasting eocn resources; not actually able to stay in production
  • consumers lose cons surplus because it is transferred to prod since cartels charge higher prices than under more competitive conditions
    • BAD
      • Cartels
      • Price rings
      • Disadv of monopoly and no econ of scale because not colluding technologically or pooling physical resources. therefore bad for econ welfare
  • Allocatively and productively inefficient because inefficient firms are kept in business whilst others make supernormal profits. can turn oligopolistic markets into pure monopoly
    • esp bad if cartel members provide essential g/s e.g. steel or raw material because they charge high prices, increase other firms (e.g. shipbuilders, car makers) CoP and in some cases may actually increase cost push inflation in econ
      • Good because can allow synergies to take place e.g. Volvo's 3 point seatbelt has saved many lives +become safety standard int'lly
        • Joint product development
          • Economically efficient because less resources wasted cheaper to do it together etc. Benefits both firms therefore ok
      • Can benefit technologically similar to when econ of scal take place but still have element of comp on other products. e.g. microsoft and intel are  not colluding but pool software on MS comps
        • SHORT TERM: Consumers are worse off and are actually in a monopoly situation.  Other producers who need stuff the cartel produces are also suffering higher CoP. Inefficient firms may stay in business which means that once cartel breaks up there may be 'zombie' businesses wasting eocn resources; not actually able to stay in production

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