Google
Thursday 
July 19, 2018 

AmosWEB means Economics with a Touch of Whimsy!

AmosWEBWEB*pediaGLOSS*aramaECON*worldCLASS*portalQUIZ*tasticPED GuideXtra CrediteTutorA*PLS
LIMITED RESOURCES: Finite quantities of labor, capital, land, and entrepreneurship available to an economy for the production of goods and services. This is one half of the fundamental problem of scarcity that has plagued humanity since the beginning of time. The other half of the scarcity problem is unlimited wants and needs.

Visit the GLOSS*arama


COLLUSION, EFFICIENCY:

Colluding oligopolistic firms generally produce less output and charge a higher price than would be the case for a perfectly competitive industry. The efficiency of colluding oligopolistic firms is essentially the same as that for monopoly. In essence, colluding oligopolistic firms function just as if the market is a monopoly. The price charged by the colluding firms is higher than the marginal cost of production and the quantity is less. Most notably, price is greater than marginal, a violation of the key condition for efficiency.
The reason that colluding oligopolistic firms are inefficient is found with market control. Because the colluding firms control the market like a monopoly, the market demand curve is THE demand curve facing the colluding firms. Because the demand curve is negatively sloped, price is greater than marginal revenue. And because these firms seek to maximize industry-wide profit by equating marginal revenue with marginal cost, the price charged is greater than marginal cost.

Profit Maximization

Collusion Inefficiency
Collusion Inefficiency
Consider the hypothetical production and sale of soft drinks in the Shady Valley area, controlled by two colluding oligopolistic firms, OmniCola and Juice-Up.

A typical profit-maximizing output determination using the marginal revenue and marginal cost approach is presented in this diagram to the right. OmniCola and Juice-Up seek to maximize profit for this two-firm industry by producing output that equates industry-wide marginal revenue (MR) and industry-wide marginal cost (MCm), which is 16,000 cans of soft drinks in this example. The corresponding price charged is $1 per can.

This profit-maximizing production is not efficient. In particular, the price is $1, but the marginal cost is only $0.40. Society is producing and consuming a good that it values at $1 (the price). However, in so doing, it is using resources that could have produced other goods valued at $0.40 (the marginal OPPORTUNITY cost). Society gives up $0.40 worth of value and receives $1.

This is a good thing. It is so good, that society should do more. However, the colluding firms are not letting this happen. They are not devoting as many resources to the production of soft drinks as society would like.

An Efficient Alternative

The degree of inefficiency can be illustrated with a comparison to perfect competition. Such a comparison is easily accomplished by clicking the [Perfect Competition] button. A primary use of perfect competition is to provide a benchmark for the comparison with other market structures, such as colluding oligopolistic firms.

A comparison between these colluding oligopolistic firms and perfect competition indicates:

  • The colluding firms produce less output than perfect competition. In this example, they produce 16,000 cans of soft drinks compared to about 24,250 cans for perfect competition. The colluding firms do not allocate enough resources to the production of soft drinks.

  • The colluding firms charge a higher price than perfect competition. In this example, the collusion price is $1 per can versus $0.69 per can for perfect competition. The colluding firms are NOT efficient because they produce at a quantity in which price is greater than marginal cost.

<= COLLUSIONCOLLUSION PRODUCTION ANALYSIS =>


Recommended Citation:

COLLUSION, EFFICIENCY, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2018. [Accessed: July 19, 2018].


Check Out These Related Terms...

     | collusion production analysis | monopoly, short-run production analysis | monopoly, efficiency |


Or For A Little Background...

     | oligopoly | collusion | explicit collusion | implicit collusion | cartel | market control | oligopoly, behavior | efficiency | perfect competition | market structures |


And For Further Study...

     | kinked-demand curve | kinked-demand curve analysis | game theory |


Search Again?

Back to the WEB*pedia


APLS

GREEN LOGIGUIN
[What's This?]

Today, you are likely to spend a great deal of time waiting for visits from door-to-door solicitors trying to buy either a large flower pot shaped like a Greek urn or a small palm tree that will fit on your coffee table. Be on the lookout for fairy dust that tastes like salt.
Your Complete Scope

This isn't me! What am I?

The average bank teller loses about $250 every year.
"After climbing a great hill, one finds many more hills to climb. "

-- Nelson Mandela, president of South Africa

ACIR
Advisory Council on Intergovernmental Relations
A PEDestrian's Guide
Xtra Credit
Tell us what you think about AmosWEB. Like what you see? Have suggestions for improvements? Let us know. Click the User Feedback link.

User Feedback



| AmosWEB | WEB*pedia | GLOSS*arama | ECON*world | CLASS*portal | QUIZ*tastic | PED Guide | Xtra Credit | eTutor | A*PLS |
| About Us | Terms of Use | Privacy Statement |

Thanks for visiting AmosWEB
Copyright ©2000-2018 AmosWEB*LLC
Send comments or questions to: WebMaster