Collusive agreements are frequent among firms that produce substitute merchandise in a market. These agreements can be in terms of sale prices or quotas. This is the control on some merchandise or the cost. These agreements are meant to control a market since companies may agree to divide a market such that one group is found in one market and now not in another after being allowed to be in another market with a larger market share. This explains why sweet bars in a sale store could be having similar expenses despite them being from different manufacturers.
Collusion practices are both necessary and a hindrance in a market depending on their impacts to corporations and households. First, collusion practices are important in exerting pressure to the market which could not have happened in its absence. These practices are used by manufacturers to gain higher market power since after pooling all their resources together, they can dictate the market prices. This restricts competition and encourages an increase in market prices. One of the major setbacks of these practices is that they reduce the amount of welfare in society. This aspect attracts anti-laws who focus on ensuring that collusion practices do not happen after a joint agreement (Choi and Gerlach 987-1022).
It requires a higher degree level of understanding the market to establish whether there are chances of collusion. It is illegal to ambush a cartel for controlling their prices without sufficient evidence that they intend to keep prices high and as a result, exploit consumers by overcharging them. Besides, the government has a duty of ensuring that the producers do not exploit consumers.
The existence of collusion practices can occur from purely non-cooperative ways. This means that if producers do not talk or engage in any form of negotiation and understanding, they can still achieve a standard price (Roberts 4). This form of collusion is legally allowed, and there is no form of control that is required by the state. However, collusion is most likely to occur when there is a possibility that deviation will amount to punishment. This means that powers within the market control an artificial collusion. This gives rise to tacit and overt collusions.
In tacit collusion, it is difficult for firms to control the coordination of price problems. It is also challenging for firms that are not talking to come up with a price that does not conform to the standards of the market. Therefore, if firms fail to communicate, the level of prices that they choose may affect their businesses and the market. Contrastingly, in an explicit collusion, producers can communicate and come up with a standard price rather than engaging in price wars. Secondly, communication allows firms to solve issues in the event there are shocks in the market.
The existence of collusion in a market is coupled with control challenges that are accompanied by economic and market shocks. Therefore, these collusions become difficult to maintain in the long run. Some of the basic explanation that is given is that firms have a diverse, competitive advantage. From the above analysis, it is evident that the candy bar scenario is a case of collusion. Firms either come together after a common agreement or forces such as price wars until they achieve a common price for certain goods and services (Roberts, 5). Furthermore, some firms agree to set their operations commonly to achieve a certain purpose.
Andrew, R. “Cartels: The Concise Encyclopedia of Economics | Library of Economics and Liberty.” Econlib.org. N.P., 2017. Web. 9 Oct. 2017.
Choi, Jay Pil, and Heiko Gerlach. “Multi-Market Collusion with Demand Linkages and Antitrust Enforcement.” The Journal of Industrial Economics 61.4 (2013): 987-1022. Web.
Roberts, Russ. “Munger on Milk | Econtalk | Library of Economics and Liberty.” Econtalk.org. N.P., 2017. Web. 9 Oct. 2017.