2. MODULE 30 (66) Oligopoly in Practice
Krugman/Wells

3. The legal constraints of antitrust policy
The factors that limit tacit collusion
The cause and effect of price wars, product differentiation, price leadership, and nonprice competition
The importance of oligopoly in the real world

4. Oligopoly in Practice
Oligopolies operate under legal restrictions in the form of antitrust policy.
Antitrust policies are efforts undertaken by the government to prevent oligopolistic industries from becoming or behaving like monopolies.
But many succeed in achieving tacit collusion.

5. Tacit collusion is limited by a number of factors, including:
Oligopoly in Practice
Tacit collusion is limited by a number of factors, including:
large numbers of firms
complex products and pricing scheme
bargaining power of buyers
conflicts of interest among firms

6. Tacit Collusion and Price Wars
Real industries often realize it is in their best interest to keep their prices above the non-cooperative level.

7. Tacit Collusion and Price Wars
A variety of factors make it hard for an industry to coordinate on high prices:
The more firms that exist, the less is the incentive to behave cooperatively.
Complex pricing schemes and complex product make monitoring other firms difficult.
Firms often differ in their perceptions about what is fair or in their best interests.
Large buyers can bargain for lower prices.

8. Tacit Collusion and Price Wars
Because tacit collusion is often hard to achieve, most oligopolists charge prices that are far below what they would charge if they could collude explicitly.
Sometimes tacit collusion breaks down and aggressive price competition amounts to a price war.

9. The Art of Conspiracy
If you want to sell valuable artwork, there are only two places to go: Sotheby’s or Christie’s.
In 2000, Diana D. Brooks, the former president of Sotheby’s pleaded guilty to a conspiracy.
With her counterpart at Christie’s, she had engaged in illegal price-fixing, agreeing on the fees they would charge people who sold artwork through either house.

10. Product Differentiation and Price Leadership
To limit competition, oligopolists often engage in product differentiation.
Product differentiation is an attempt by a firm to convince buyers that its product is different from the products of other firms in the industry.

11. Product Differentiation and Price Leadership
When products are differentiated, it is sometimes possible for an industry to achieve tacit collusion through price leadership.
Oligopolists often avoid competing directly on price by engaging in non-price competition through advertising and through other means.

12. Product Differentiation and Price Leadership, cont’d
In price leadership, one firm sets its price first, and other firms then follow.
Firms that have a tacit understanding not to compete on price often engage in intense nonprice competition, using advertising and other means to try to increase their sales.

13. How Important is Oligopoly?
Oligopoly is far more common than either perfect competition or monopoly.
Predictions from the supply and demand model are often valid for oligopoly.

14. How Important is Oligopoly?
Is the model of perfect competition still useful?
Yes, important parts of the economy are fairly well explained by the perfect competition model.
The analysis of oligopoly is far more difficult than that of perfect competition.
Economists like to use the assumption of perfect competition.

15. In order to limit the ability of oligopolists to collude and act like monopolists, most governments pursue an antitrust policy designed to make collusion more difficult.
In practice, however, tacit collusion is widespread.
A variety of factors make tacit collusion difficult: large numbers of firms, complex products and pricing, differences in interests, and bargaining power of buyers.
When tacit collusion breaks down, there is a price war.
Oligopolists try to avoid price wars in various ways, such as through product differentiation and through price leadership, in which one firm sets prices for the industry. Another is through nonprice competition, like advertising.