Collusive Oligopoly

In today's markets, a few giant firms often team up (collude) to avoid price wars that hurt profits. This forms collusive oligopoly, unlike non-collusive models (e.g., Cournot or kinked demand) where firms guess rivals' moves, causing pricing uncertainty.
Analogy: Imagine gas stations on one road—if one cuts prices, others match it fast, sparking a "race to the bottom." Collusion is like them agreeing: "No price cuts!"

Few firms control uniform products (pure oligopoly). Low demand + excess capacity tempts price cuts for sales, but rivals retaliate immediately—erasing gains and risking endless wars.

Key Reasons to Avoid Cuts:

• Rivals match cuts, so market share doesn't grow.
• Hard to raise prices later.
• If demand is inelastic (buyers don't buy more even if cheaper), revenue drops.
• Uncertainties (e.g., differing cost views) make outcomes unpredictable.

Firms compete via better products, ads, or quality (harder for rivals to copy quickly due to patents/time). Examples: Coke vs. Pepsi ad battles.

Cartels are secret pacts to act like a monopoly: fix prices, share markets.
Formation Steps:

1. Agree on a single price via bargaining (high-cost firms want higher; low-cost push lower—but all earn profit).
2. No undercutting allowed.
3. Compete non-price: ads, designs, styles.

Real-Life Example: OPEC oil cartel sets global prices; members share quotas despite cost differences.

• In collusive oligopoly, firms enter into agreements or form cartels to avoid price wars and maximise profits.
• Firms fix a common price and compete through non-price methods like advertising, product quality, and design.
• Collusion reduces uncertainty and rivalry arising from interdependence among firms.
• Cartels aim to ensure profit for all member firms, though they may differ in costs and market strategies.