Collusion

Collusion is an agreement between firms to avoid various competitive practices, particularly price reductions. Oligopolists will form a cartel, which is an organization of sellers designed to coordinate supply decisions so that the joint profits of members will be maximized.

Obstacles to collusion:

• Large number of competitors.
• Difficulty in detecting and eliminating cheating
• Low barriers to entry
• Unstable demand
• Vigorous antitrust action by the government.

Government policies for reducing collusion:

• Antitrust actions {Break up monopolies and disapprove mergers}.
• Reduce quotas, tariffs, and other barriers to competition.
• Regulate the price and output.
• Set up government-owned firms to produce and supply the goods.

Note:

• (1) and (2) are approved by economists, while (3) and especially (4) are not.