What is the meaning of Oligopoly?
Oligopoly is a market structure that occurs when a few firms dominate the industry. It can occur naturally or as a result of government intervention. There are only very few oligopolies in the economy, and they have been studied extensively by economists due to their relatively rare occurrence and importance in shaping an economy.
What is Collusive Oligopoly?
Collusive oligopoly is a type of oligopoly where the firms decide among themselves to fix prices and production so as to take advantage of each other’s market power. It involves collusion or secret agreements between competitors. Collusive oligopolies can occur naturally in some industries due to economies of scale and product differentiation.
An example of a collusive oligopoly is OPEC, which involves a few oil-producing countries agreeing to limit the amount of oil they produce and thereby influencing prices in their favor. Another example is diamond mines, where the companies have historically had very close relationships with each other and have been more interested in maintaining the status quo than in increasing production.
What is Non-Collusive Oligopoly?
Non-collusive oligopoly is a type of oligopoly where there are no secret agreements among the firms in an industry. It does not involve collusion between companies and can be difficult to distinguish from perfect competition at first glance. However, there are considerable differences between the two market structures that make non-collusive oligopoly far more difficult to sustain than perfect competition.
Non-collusive oligopolies can occur due to economies of scale, product differentiation, and high barriers to entry into the industry. An example of a non-collusive oligopoly is that found in banking. The banks are not colluding with each other, but the barriers to entry for a new bank into the industry are very high, due to economies of scale and customer loyalty.
Collusive Oligopoly vs Non-Collusive Oligopoly: What’s the difference?
The main difference between collusive oligopoly and non-collusive oligopoly is that in the former there are secret agreements between firms whereas, in the latter, such interactions do not take place.
The main similarity between both market structures is that they involve few competitors and a considerable degree of control over the industry by these companies.
Here are some important differences between Collusive & Non-Collusive Oligopoly –
- The collusion agreement is a secret in a collusive oligopoly whereas, it is not in a non-collusive oligopoly.
- Price and production are fixed by the firms themselves in the case of collusive oligopoly, while no such fixing occurs in non-collusive oligopoly. This means that prices are determined by the market forces of demand and supply in a non-collusive oligopoly.
- There is no collusion between firms in a non-collusive oligopoly, but there is in a collusive oligopoly. For example, OPEC is an example of a collusive oligopoly whereas, U.S.’s banking industry is an example of a non-collusive oligopoly.
- Collusion between firms can occur naturally in a collusive oligopoly whereas, it does not in a non-collusive oligopoly. For example, OPEC is a natural case of a collusive oligopoly because oil producers have a natural incentive to keep prices high.
- Non-collusive oligopoly can occur due to economies of scale and product differentiation whereas, collusive oligopoly does not require such reasons for its existence.
- Collusion is never sustained in non-collusive oligopoly whereas, collusion may be sustained for longer periods of time due to its inherent stability in collusive oligopoly.
- Collusion in a non-collusive oligopoly can lead to higher prices and profits for the firms involved, but collusion in a collusive oligopoly leads to lower prices and better efficiency of production. For example, OPEC has the power to keep global oil prices high due to its market share.
- Collusion in a non-collusive oligopoly is not illegal whereas, collusion in a collusive oligopoly is illegal because it violates antitrust laws which are designed to prevent monopolies from gaining too much control over an industry.
- There are high barriers to entry for firms in non-collusive oligopoly whereas, there are low barriers to entry for these companies in collusive oligopoly. For example, banks have a high barrier of entry due to economies of scale and customer loyalty that would take a long time and considerable investment to overcome.
- Collusion in a non-collusive oligopoly leads to a decline in the quality of goods and services since it results in less competition, while collusion in a collusive oligopoly can lead to an increase or no change at all depending on the extent of the collusion agreement.
These are some of the major differences between Collusive Oligopoly and Non-Collusive Oligopoly! Share your thoughts on Oligopoly by commenting below. Thank You 🙂