An oligopoly is a market structure in which only a few firms control an industry. This oligopoly market structure is detrimental to consumers because they have to pay higher prices. But it benefits the company because it can sell at a higher price. There are several types of oligopoly namely Pure Oligopoly, Distinguishing Oligopoly, Exclusive Oligopoly, Non-collusive Oligopoly.
Exclusive oligopoly or collusive oligopoly is a term in Indonesian, in English it is called collusive oligopoly. Collusive oligopoly is a form of oligopoly in which the oligopoly firms work together to regulate prices. By setting prices together, each company can generate maximum profits, on the other hand consumers get unreasonable prices. This happens because the price mechanism in the market does not work.
Main Purpose of Collusive Oligopoly
Companies that carry out collusive oligopoly have the following objectives:
Each company recognizes that they are interdependent, and so must act together to maximize their profits.
Competition between producers in oligopoly markets can damage prices, thereby reducing profits and creating uncertainty by setting prices, the risk of uncertainty can be controlled, and profits can be maximized.
Setting prices together can reduce costs that must be incurred, for example, can reduce advertising costs.
Driving Factors Collusive Oligopoly
Collusive Oligopoly is easier to form when:
There are major barriers preventing new players from entering the market. This obstacle makes the number of players in the market not increase and only a small number.
Market demand is not very varied. That is, demand is predictable because demand does not undergo a cycle of major changes, this condition causes oversupply situations to be rare.
Demand is relatively inelastic. This non-relative demand is usually found in goods that are urgently needed by the community, so that an increase in prices can increase the profits of market participants.
Easy to monitor the output of each production of each company. Under these conditions, the cartel can control supply and identify companies that violate the price-fixing agreement.
Collusive Oligopoly is a type of oligopoly in which only a few producers work together to determine the price of goods or services.
In an ideal oligopoly market, when firms A and B produce goods of type XX have a rival, namely company C which is able to sell more types of XX goods, companies A and B can lower the price of goods of type XX they produce so that consumers switch to buying their goods instead of goods company B’s production. From an ideal oligopoly market, it will ultimately benefit society because each company will try to offer the best goods at the lowest possible prices.
But one day a unique condition arose where company A, company B and company C which produced goods of type XX did not compete to offer the lowest possible price for goods to consumers. The three companies decided to work together to determine the right price for type XX goods and would not sell at a lower price than the predetermined price. This condition is called a collusive oligopoly.
There are many types of trading systems, each of which makes a price agreement so that it can be said that the goods sold are the market price. Whereas those who market have made an agreement called an oligopoly. This oligopoly is related to product differentiation, meaning that the product is the same but the price is different. Therefore, if there is a product that is in an oligopoly, then two or more sellers can admit that the goods are related. Even the quality can be said to be exactly the same. One of the oligopoly that we can know is collusive oligopoly.
Collusive oligopoly is one type of oligopoly that resembles a monopoly where the action is to extract the maximum amount of profit that the customer gets. So it can be simplified when several companies often try to agree to set a price so as to maximize the total profit of the industry.
The most typical form of collusion is where companies work together to profit from a monopoly is a cartel. A cartel is a formal agreement between companies regarding prices and/or marketing areas. So basically this cartel is done in order to build trust between the two parties.
When there is product differentiation, i.e. a differentiated oligopoly, two or more sellers may realize that their prices are closely related. Since every company is a price seeker, each will guess and learn from experience that when and when it cuts prices, its competitors tend to match or even exceed those discounts. The consequence: a constant price war, which stops as soon as several sellers feel that they are in the same boat.
In the past, oligopolists used to form cartels or trusts. Recently, this strategy has become ineffective due to the widespread adoption of anti-trust laws. In fact, oligopolists are hesitant to charge exorbitant prices because it can tempt new competitors to enter the industry. They will, of course, charge a higher price than a purely competitive price but with the necessary moderation to keep new firms from being drawn into the industry.
The most common form of collusion in which companies join hands to profit from a monopoly is a cartel. A cartel is a formal agreement among companies regarding pricing and/or market sharing.
Companies often get together and set prices to maximize the industry’s total profit. This collusive oligopoly resembles a monopoly and extracts maximum profit from the customer.
If the cartel has absolute control over its members as does OPEC, the cartel can operate as a monopoly.
Collusive Oligopoly Vs Cartel
In the past, oligopoly collusion was called a cartel or trust, but at present this strategy is not widely implemented and is no longer effective because many countries have enacted antitrust laws. A cartel is one of the most common forms of collusive oligopoly, a cartel is an agreement made by a collection of companies regarding price fixing, distribution area determination or market division. The group of companies consists of various different legal entities that cooperate with the aim of increasing the profits of their respective companies without any business competition between companies.
In the discipline of economics, in general, we recognize two types of market structures and mechanisms, namely the structure and mechanism of a perfectly competitive market and the structure of an imperfect competition market. Perfect competition market is characterized by the characteristics of the number of sellers and buyers are many, buyers and sellers have complete information about the market and there is no direct intervention or intervention from the government. The imperfect competition market structure is characterized by the characteristics of few sellers and many buyers. Because there are only a few sellers, the sellers can still dominate, regulate and determine the price of the goods being traded, either by collaborating or making an agreement between the seller and the producer or moving independently or conducting price wars between producers. In an imperfect competition market, we know the terms monopoly market and oligopoly market. This time we will discuss collusive oligopoly or oligopoly with an agreement that is part of the characteristics of the oligopoly market.
