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Collusion in Oligopoly Market
Collusion is motivated by several factors: increased profits, reduced cash flow uncertainty, and improved opportunities to construct barriers to entry.
When collusive agreements are made openly and formally, the firms involved are called a cartel.
Six major factors that affect the chances of successful collusion:
The number and size distribution of sellers.
The similarity of the products.
Cost structure.
Order size and frequency.
The strength and severity of retaliation.
The degree of external competition.
[Practice Problems] Collusion is less likely in a market when:
the product is homogeneous.
companies have similar market shares.
the cost structures of companies are similar.
[Solutions] B
When companies have similar market shares, competitive forces tend to outweigh the benefits of collusion.
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