Price collusion...

Please explain the factors that affect the chances of successful collusion…i just dont get the concepts …

please any help would be appreciated…

  • Fewer firms - makes it easier for the cartel to keep an eye on everyone
  • Products are similar - differentiated products lead to different demand curves for each firm
  • Cost structures are similer - no firm has a cost advantage that will support lower prices
  • Purchases are relatively small and frequent - _ I’ll have to ponder this one a bit _
  • Retailation is certain and severe - disincentive to cheat
  • Low competition outside the cartel - lower competition leads to higher profit margins, less need to protect one’s market share

if the size of purchases are large and infrequent - the supplier of the product would know the demand and can adjust the price upwards - causing collusion. You are also likely to have fewer suppliers. If however they are small and frequent - you are likely to have more suppliers - and there is uncertainty over the demand as well - so more difficult to artificially adjust prices.

Sounds reasonable.

To put it very simply - it’s monopolistic competition with added favorable conditions that would allow collusion. It’s usually pretty logical when you look at the answers that are provided in practice questions.

e.g “which of the following factors would not help successful collusion” in a test. They will then give you a list of factors like the ones S2000magician mentioned and one will be different and inferior to the others for collusion. This would be the correct answer :wink:

Please correct me if i am wrong…

Price collusion is a arrangement of companies to work together so as to make a monopoly of its own thereby increasing profits and lowering competition outside the arrangement…thereby increasing market share…

Please explain me…this point…

Why would it be required to have similiar cost structures for successful price collusion


This is completely the other way around, as frequent and small orders help collusion, infrequent and large orders harm collusion.

The reasonable explanation I got from google:

  1. frequent and small orders allows for quick response to cheating behaviours
  2. frequent and small orders does not offer enough profit (incentive) for cheating (think about LNG ships vs fishing ships, LNG ships each cost billions to build and generates millions of profits each order there is much higher incentive for a ship builder to cheat to get LNG ship orders than to get small ship orders)