# Collusion- What are the consumer benefits? watch

1. Hi everyone

I'm currently doing this essay that requires me to evaluate the collusion of oligopolies. While i've got TONS of reasons why its not for consumer benefits but for producers only, i can't think of any on how it is good for consumer benefits

If you'd be kind enough to please explain how collusion could be for a consumer benefit in detail, i would be extremely grateful thank you : )
2. There are pretty much no benefits to the consumer. The price is raised and the products are less high quality. There is a very good reason it is illegal.

One benefit I did think of was to third parties. OPEC (oil cartel) and Greenpeace actually have similar interests in a suprising way. OPEC artificially increase the price of oil thorugh collusion. This reduces quantity consumed. This decreases the 'amount' of negative externalities of pollution. This would be the same outcome Greenpeace would want. (It is a bit of a leaky concept but is logical). Collusion for demit for goods is positive.

The point I would make is defection. The example I would use is the prisoners dilemna. Firms may agree to collude and put prices up but then one of them defects and reduces prices.

Game theory shows that it is not in the best interests of the firms to collude.

Here is a generalisation of a pay off matrix in a douoply where profit is the pay off. The left payoff of is the pay off of the left column player and the right payoff is for the top player.

This matrix shows that if both firms collude they will get 2 which is better than if both firms defect (compete) and get 1. However it is never in the best interest of the firms cooperate. This is because cooperating is a strictly dominated strategy (i.e you always do better picking something else)

If we take player left as an example. If the other player cooperates then he should defect because he will get 3 which is better than 2 (if he cooperate). If the other player defects then he should defect because 1 is greater than 0.

What this shows is that it is never in the best interests of a firm to cooperate if they are rational. This is the basis of a nash equilibrium - selfishness is best. This notion of dominant strategies is why price wars occur in oligopolies. Each firm is forced to bring AC down to AR and do not make any economic profit.

(Note that if the other player assumes that his opponent will pick the dominant strategy then they should defect. This lead to lower profit for both firms but they are not exploitabe.)

This equates to the point that 'if' players are rational then collusion will not occur.
3. (Original post by shan735)
Hi everyone

I'm currently doing this essay that requires me to evaluate the collusion of oligopolies. While i've got TONS of reasons why its not for consumer benefits but for producers only, i can't think of any on how it is good for consumer benefits

If you'd be kind enough to please explain how collusion could be for a consumer benefit in detail, i would be extremely grateful thank you : )
Hi there, like what the guy above posted, the general idea is that private cartels are not good for consumers (due to many reasons including an imbalance of information towards firms). As a result they are illegal in the EU and many other countries outside it, however they are still legal in some places.

Any argument for benefits to consumers of collusion will be somewhat flimsy.

Cartels can clearly potentially benefit consumers if they choose to price discriminate against internationals (ie. OPEC may charge higher prices or restrict supply exclusively to countries not involved; for example consumers in Iraq, Kuwait, Saudi Arabia etc may still benefit from cheaper prices as well as the revenue gained from charging higher prices to the UK.)

I was also going to mention the negative externalities thing - turn and fall explained clearly how this might benefit consumers, but yeah, the argument is sort of... eh... xD

Because cartels often operate behind closed doors (for legal reasons etc) it's hard to note the benefits from them; two separate firms colluding would be different to two separate firms merging.

Perhaps if you just mention this you'll still get the points. Like you said, it's difficult arguing both sides to an argument that really is weighted towards one side than the other lol.
4. There are some strong benefits.

1) Oligopolies and monopolies tend to investin R&D more.

In a fiercely competitive market there is less (or no) producer surplus. Oligopolies and monopolies don't just sit on their producer surplus - they plough much of it back into R&D with long-term benefits if these improvements affect the consumer.

Conversely, in a more competitive market with more producers, 1) there is less producer surplus available and 2) R&D is a less attractive commercial proposition because only a smaller slice of a smaller producer surplus is available in the future.

2) Economies of scale

In many markets the economies of scale are such that the market is a natural oligopoly - there is only room for a small number of producers to operate productively. Consider, for example, rail companies. As a result, consumer prices are much lower than if there were more producers operating smaller outfits. This is a key point, I think. Markets like energy supply, transport infrastructure, postal services, movie studios, full-service commercial law firms and accountancy firms, telecoms, aircraft manufacture etc. can ONLY work as oligopolies due to the economies of scale involved.
5. (Original post by turn and fall)
The point I would make is defection. The example I would use is the prisoners dilemna. Firms may agree to collude and put prices up but then one of them defects and reduces prices.

Game theory shows that it is not in the best interests of the firms to collude.

Here is a generalisation of a pay off matrix in a douoply where profit is the pay off. The left payoff of is the pay off of the left column player and the right payoff is for the top player.

This matrix shows that if both firms collude they will get 2 which is better than if both firms defect (compete) and get 1. However it is never in the best interest of the firms cooperate. This is because cooperating is a strictly dominated strategy (i.e you always do better picking something else)

If we take player left as an example. If the other player cooperates then he should defect because he will get 3 which is better than 2 (if he cooperate). If the other player defects then he should defect because 1 is greater than 0.

What this shows is that it is never in the best interests of a firm to cooperate if they are rational. This is the basis of a nash equilibrium - selfishness is best. This notion of dominant strategies is why price wars occur in oligopolies. Each firm is forced to bring AC down to AR and do not make any economic profit.

(Note that if the other player assumes that his opponent will pick the dominant strategy then they should defect. This lead to lower profit for both firms but they are not exploitabe.)

This equates to the point that 'if' players are rational then collusion will not occur.
...and you would get 0 on the exam because this doesn't even attempt to answer the question.
6. (Original post by jacketpotato)
There are some strong benefits.

1) Oligopolies and monopolies tend to investin R&D more.

In a fiercely competitive market there is less (or no) producer surplus. Oligopolies and monopolies don't just sit on their producer surplus - they plough much of it back into R&D with long-term benefits if these improvements affect the consumer.

Conversely, in a more competitive market with more producers, 1) there is less producer surplus available and 2) R&D is a less attractive commercial proposition because only a smaller slice of a smaller producer surplus is available in the future.

2) Economies of scale

In many markets the economies of scale are such that the market is a natural oligopoly - there is only room for a small number of producers to operate productively. Consider, for example, rail companies. As a result, consumer prices are much lower than if there were more producers operating smaller outfits. This is a key point, I think. Markets like energy supply, transport infrastructure, postal services, movie studios, full-service commercial law firms and accountancy firms, telecoms, aircraft manufacture etc. can ONLY work as oligopolies due to the economies of scale involved.
Some good points about oligopoly and monopoly market structures, and collusion does "often" occur within oligopoly and can create price-setting power for firms, but I would have thought it's slightly off topic?

Cartels are usually formed to secure market share and price setting power (without consumers knowing), not really to exploit economies of scale since the firms did not merge/integrate. If you wanted to argue this OP I would mention what turn and fall said; in short, each firm would have to trust one another and this usually doesn't hold up for long as each one has their own incentive to break the collusion first.

It can be tricky for firms to decide how much of what to share between them, how much profit each one should get, how much investment into each firm... etc
7. (Original post by roginho)
...and you would get 0 on the exam because this doesn't even attempt to answer the question.
Agreed. The question is silly. The best one I can think of that directly benefits the consumer is industry standards. This means that products should be interchangable. An example of this is Microsoft Office. Apple and Microsoft have basically colluded by agreeing not to compete. This has lead to a situation where everyone uses MO. This means people can share files more easily. Imagine the nightmare if everyone used different operating systems.

But yeah my answer is beyond A-Level and answers the question of what are the benefits to the firms. Which it turns out are less than one might expect.

There are some strong benefits.

1) Oligopolies and monopolies tend to investin R&D more.

In a fiercely competitive market there is less (or no) producer surplus. Oligopolies and monopolies don't just sit on their producer surplus - they plough much of it back into R&D with long-term benefits if these improvements affect the consumer.

Conversely, in a more competitive market with more producers, 1) there is less producer surplus available and 2) R&D is a less attractive commercial proposition because only a smaller slice of a smaller producer surplus is available in the future.

2) Economies of scale

In many markets the economies of scale are such that the market is a natural oligopoly - there is only room for a small number of producers to operate productively. Consider, for example, rail companies. As a result, consumer prices are much lower than if there were more producers operating smaller outfits. This is a key point, I think. Markets like energy supply, transport infrastructure, postal services, movie studios, full-service commercial law firms and accountancy firms, telecoms, aircraft manufacture etc. can ONLY work as oligopolies due to the economies of scale involved.
This answer does not refer to collusion. There are benefits of oligopolies to consumers but not really for collusion.
8. (Original post by Chelle-belle)
Some good points about oligopoly and monopoly market structures, and collusion does "often" occur within oligopoly and can create price-setting power for firms, but I would have thought it's slightly off topic?

Cartels are usually formed to secure market share and price setting power (without consumers knowing), not really to exploit economies of scale since the firms did not merge/integrate. If you wanted to argue this OP I would mention what turn and fall said; in short, each firm would have to trust one another and this usually doesn't hold up for long as each one has their own incentive to break the collusion first.

It can be tricky for firms to decide how much of what to share between them, how much profit each one should get, how much investment into each firm... etc
You are right, I was lazy and didn't apply to the question properly

However, I don't think talking about cartels addresses the question properly either. Cartels are a particular type of collusion, but not all collusion is a cartel.

The analysis from my previous post can be applied very comfortably to collusion, because collusion leads to a more oligopolostic market structure with all its attendant benefits - i.e. if two firms have 20% market share, by colluding they act like one with 40% with all the attendant consequences
9. (Original post by jacketpotato)
You are right, I was lazy and didn't apply to the question properly

However, I don't think talking about cartels addresses the question properly either. Cartels are a particular type of collusion, but not all collusion is a cartel.

The analysis from my previous post can be applied very comfortably to collusion, because collusion leads to a more oligopolostic market structure with all its attendant benefits - i.e. if two firms have 20% market share, by colluding they act like one with 40% with all the attendant consequences
Of course. I think we all agree that any argument for an increase in consumer welfare resulting from collusion will be weak and not necessarily true though - which was my main point; the fact that they are still two firms (and not one) means they share the market share, and therefore the profits, and therefore somehow have to decide on the terms of collusion (difficult difficult task lol - and perhaps even harder to resist the temptations of breaking). Which in turn is why this is a flimsy argument. I believe the main point is still to squeeze out smaller competitors and entrants to the market, instead of being of benefit to consumers.

It is a good point that the formation of cartels is a particular type of situation (OP take note of this )
10. hey guys
thanks for everything
I've given in my work and i'm hoping for a good grade for that assessment
Thanks again
11. (Original post by turn and fall)
There are pretty much no benefits to the consumer. The price is raised and the products are less high quality. There is a very good reason it is illegal.

One benefit I did think of was to third parties. OPEC (oil cartel) and Greenpeace actually have similar interests in a suprising way. OPEC artificially increase the price of oil thorugh collusion. This reduces quantity consumed. This decreases the 'amount' of negative externalities of pollution. This would be the same outcome Greenpeace would want. (It is a bit of a leaky concept but is logical). Collusion for demit for goods is positive.

The point I would make is defection. The example I would use is the prisoners dilemna. Firms may agree to collude and put prices up but then one of them defects and reduces prices.

Game theory shows that it is not in the best interests of the firms to collude.

Here is a generalisation of a pay off matrix in a douoply where profit is the pay off. The left payoff of is the pay off of the left column player and the right payoff is for the top player.

This matrix shows that if both firms collude they will get 2 which is better than if both firms defect (compete) and get 1. However it is never in the best interest of the firms cooperate. This is because cooperating is a strictly dominated strategy (i.e you always do better picking something else)

If we take player left as an example. If the other player cooperates then he should defect because he will get 3 which is better than 2 (if he cooperate). If the other player defects then he should defect because 1 is greater than 0.

What this shows is that it is never in the best interests of a firm to cooperate if they are rational. This is the basis of a nash equilibrium - selfishness is best. This notion of dominant strategies is why price wars occur in oligopolies. Each firm is forced to bring AC down to AR and do not make any economic profit.

(Note that if the other player assumes that his opponent will pick the dominant strategy then they should defect. This lead to lower profit for both firms but they are not exploitabe.)

This equates to the point that 'if' players are rational then collusion will not occur.
Your example of the benefit for demerit goods is legit, I just read a similar thing on tutor2u.

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