Difference Between Collusive and Non-Collisive Oligopoly

Difference Between Collusive and Non-Collisive Oligopoly

safepedia.com – In this article, I will discuss the difference between collusive and non-collusive oligopoly. The literal meaning of the word ‘ oligopoly ‘ is ‘
competition between little ‘. Collusive Oligopoly is when oligopolies come in formal or informal agreement with each other to avoid competition among themselves.

On the other hand, in a non-collusive oligopoly, firms tend to compete with each other, by setting their own price and output policies, which are independent of other firms.

In a collusive oligopoly, competing firms unite to eliminate the causes of uncertainty from the inherent competition among firms. In contrast, In a non-collusive oligopoly, the firms operating in the industry are rivals, because of their interdependence.

Difference Between Collusive and Non-Collisive Oligopoly

  • What is an Oligopoly?
  • Definition of Collusive Oligopoly
  • Definition of a Non-Collisive Oligopoly
  • Difference Between Collusive and Non-Collisive Oligopoly
  • Collusive Model
  • Non-Collisive Model

What is an Oligopoly?

Oligopoly is a type of market characterized by several firms offering a homogeneous product or differentiated products for sale in the market. For example, Telecom service providers.

When firms sell homogeneous products, they are called pure oligopoly, such as cement, steel, aluminum, etc., whereas if firms sell differentiated products, it is called impure or differentiated oligopoly, such as cold drinks, cars, etc.

Definition of Collusive Oligopoly

Collusive Oligopoly refers to a form of oligopoly in which rival firms collude to minimize competition and maximize mutual profits by reducing uncertainty arising from competition and selling goods and services at monopoly prices. In this case, the oligopolist makes a contract to set the price level and output in the market.

This can be found in industries where the products sold by the company are homogeneous. In this type of oligopoly companies know that if they increase or decrease prices, there will be a shift in the demand curve, because the products offered by all companies are homogeneous. So, customers can make purchases indifferently from any company. Therefore, this can lead to huge loss of profits due to price wars.

Therefore, by deciding not to compete with each other, they can determine the monopoly price that will be charged and the agreement that will be reached on the output produced by each firm. By doing this, the oligopolist can achieve mutual profit maximization, i.e. by working as one company which is called collusion.
Collusion can be of two types:

  1. Cartel: Producer companies make formal agreements that state the prices and outputs of each company that is a member of the cartel. So, in a cartel the companies jointly set the price and output policies through agreement. For OPEC Example
  2. Price Leadership: There is an implicit understanding between oligopolies for coordinating prices, where the dominant firm initiates a price change and all other firms follow suit, or adjust for the price change.

It can be used to prevent uncertainty caused by interdependence, prevent price wars, avoid competition, raise prices and also increase profit margins.

This can be an open or tacit agreement (Secret). In most countries, open agreements regarding the formation of monopolies are illegal, and that is why companies often make tacit agreements.

Definition of a Non-Collisive Oligopoly

Non-collusional oligopoly is the oldest competition theory. It refers to an oligopoly in which firms compete with each other. In a non-collusive or non-cooperative oligopoly, firms survive in a strategic environment, because they start with a certain strategy without colluding with competitors.

So, in a non-collusive oligopoly:

  • Companies do not depend on each other.
  • There are many companies.
  • Barriers to entry are very few.
  • It has strict government regulations.
  • Every company develops expectations about what competitors will do.

Therefore, companies must consider the possible actions of competitors and how to react. Thus, a non-collusive oligopoly is characterized by price inflexibility. Each firm in a non-collusive oligopoly tries to increase its market share through competition. Therefore, companies prefer competition over collusion, as a way to maximize profits.

Difference Between Collusive and Non-Collisive Oligopoly

As we have understood the meaning and concept, let’s now look at the difference between collusive and non-collusive oligopoly:

  1. Collusive Oligopoly can be interpreted as a form of oligopoly in which sellers eliminate competition through formal or informal agreements. In contrast, a non-collusive oligopoly is an oligopoly in which each firm sets its own price and level of output and competes in the market.

  2. In a collusive oligopoly, firms act as sole monopolies and intend to increase their collective profits, not individual profits. On the other hand, in a non-collusive oligopoly, firms intend to increase their own profits and determine the volume of output to be produced, assuming that rival firms will not change the quantity supplied by them.

  3. Firms operating under oligopolistic competition often enter into collusive agreements to avoid the uncertainty caused by interdependence, to avoid price wars and intense competition. On the other hand, the goal of non-collusive oligopoly is to maintain competition and work independently as a normal business.

  4. The price decisions of output under a collusive oligopoly are reciprocal and interdependent, whereas, in the case of a non-collusive oligopoly, the price and output decisions are independent of other firms.

  5. In a collusive oligopoly, firms agree to set prices and output together, so they act as one firm, leading to the formation of a monopoly. But, in a non-collusional oligopoly, because no firms collude with each other and there is a sense of competition between them, a monopoly is not formed.

  6. Since a collusive oligopoly leads to the creation of a monopoly, consumers receive less profit, because the product is offered for sale to consumers at the same price by all sellers. In contrast to non-collusive oligopoly, there is no monopoly which results in competition between selling companies so that consumers get a price advantage.

  7. In a collusive oligopoly, there is no need to spend money to create brand loyalty. On the other hand, in aggressive advertising non-collusional oligopoly creates brand loyalty.

Collusive Model

Difference Between Collusive and Non-Collisive Oligopoly-1

Cartel: Initially, the word ‘cartel’ was used for agreements in which there is a joint sales agent who carries out the sales activities of all the member companies. However, nowadays, all the formal, informal and tacit agreements that take place between oligopolists are called cartels. Because it tends to reduce competition, it is considered illegal in many countries.

Price Leadership: In the price leadership model, one dominant firm sets the price of a good while other competitors follow suit.

Low Cost Price Leader: To maximize profit, low-cost firms charge a lower price than the profit-maximizing price of high-cost firms so that high-cost firms will be forced to lower their prices.

Market Dominant Price Leader: According to this model, there are one of the few firms in the industry, generating such a large volume of the industry’s total output that they dominate the market. The company estimates its demand and sets a suitable price that increases its profits.

Barometric Price Leader: In this model, the oldest, largest, most experienced and respected companies act as guardians of other companies, protecting the interests of all companies. Companies analyze market conditions, for various factors such as demand, production costs, competition, etc., and decide on a price, which is the best price, from the point of view of all companies in the industry.

Exploitative or Aggressive Price Leadership: Below, one dominant firm marks its leadership by implementing an aggressive pricing policy and thereby forcing other firms in the industry to follow the same pricing regime.

Non-Collisive Model

Difference Between Collusive and Non-Collisive Oligopoly-2

Cournot models: This model describes the structure in an industry where competitors offer homogeneous products. They compete on the amount of output produced, independently and simultaneously.

Bertrand Models: This is an economic model, in which several firms produce homogeneous goods and sell them to many customers. Identical products are produced at constant marginal cost. Every firm in the industry considers a competitor’s price to be a fixed price, when determining the price to charge. So the price is set independently.

Edgeworth Models: In this model, the firm sells a product that is homogeneous and has the same cost function with zero marginal cost. It is assumed that no duopoly firm can produce an output that is as large as a competitive market.

Stackelberg models: In this model, one firm is the market leader while the other is the follower. The company offers homogeneous and competitive products on the basis of output. Next, the outputs are selected by the firm in order. The lead company sets the quantity before any other company. This is appropriate when large companies dominate the entire industry.

Sweezy Models: Also known as the convoluted demand model. As per this model, there are only a few companies in the market that sell differentiated products to consumers. There are barriers to entry of new companies. It is believed that the company will follow the price decline, but will not follow the price increase.

That is the description of the difference between collusive and non-collusive oligopoly. Hopefully this article is useful for you, thank you for visiting and don’t forget to share this article with your friends.

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