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COLLUSION!!

Collusion occurs if firms agree to work together on something. For example,


they might choose to set a price or fix the quantity of output they produce,
which minimizes the competition they face.
Leads to: lower consumer surplus, higher prices and greater profits for firms
OVERT COLLUSION
- When a formal agreement is made

TACIT COLLUSION
- No formal agreement is made!
-For example, in the UK supermarket
industry, firms are competing in a
price war. One lowers the price,
others will follow

COSTS OF COLLUSION:

Loss of consumer welfare, prices are raised and output is reduced


Absence of competition means efficiency falls -> increases average
cost of production
Reinforces monopoly power of existing firms, makes it hard for new
firms to enter
Lower quantity supplied leads to loss of allocative efficiency

BENEFITS OF COLLUSION:

Industry standards could improve because firms can collaborate on


technology and improve it (pharmaceutical industry and for car safety
tech)
Excess profits can be used for investment, which might improve
efficiency in the long run. Alternatively, they might be used on
dividends
Saves on duplicate research and development
By increasing their size, firms can exploit economies of scale, which
leads to lower price