Why Are Oligopolies Tempted to Collude?

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Why are oligopolies tempted to collude?

Stephen (2007) and Stuart (2007) have identified that oligopoly refers to a situation where a few dominate the market, often producing a large number of branded products. And, Kevin, (2005) states that it is defined as the situation in which the number of firms is sufficiently small for the action of a single firm to be able to influence the market. In this essay, I am going to talk about why are oligopolies tempted to collude, give some example and theory to prove it.

Undoubtedly, there are some features of oligopolies. It exists when there are only a few dominating sellers, each of them occupies a significant share of the market. For example, major airlines like British Airways and Air France operate their routes with only a few close competitors, but there are also many small airlines catering for the holidaymaker or offering specialist services. Besides, it is difficult for new forms to enter to the market. As the existing firms are well-established and have already benefited from economies of scale, so the new firms have to pay high cost to compete with them. Also, the market information is imperfect so that no one can know all the market information such as price, quality and quantity, etc. Furthermore, Carol et al, (2007) writes that oligopolists often use non- price competition, they differentiated services and marketing campaigns are used to boost sales, such as advertising and offering free gifts to distinguish their products from other sellers. Because there are few participants in this type of market, each oligopolist is aware of the actions of the others. The decisions of one firm influence, and are influenced by the decisions of other firms. Strategic planning by oligopolists always involves taking into account the likely responses of the other market participants. This causes oligopolistic markets and…...

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