How can collusion be prevented in an oligopolistic market?

Question

How can collusion be prevented in an oligopolistic market?

Answer

Collusive behaviour is found is many oligopolistic markets, markets in which competition is limited due to the presence of few dominant firms. Collusion can be explained by the desire to secure joint profit maximisation in a market, as well to prevent revenue and price instability in an industry. Some examples of oligopolistic markets in the UK include fixed broadband supply, dominated by four main suppliers, namely BT, Virgin Media, Sky and TalkTalk, and fuel retailing dominated by six main suppliers, namely Tesco, BP, Shell, Esso, Morrisons and Sainsbury (Blair and Sokol, 2015). In spite of its perceived benefits to dominant firms, collusion is hard to achieve in practice. Some factors that deter collusion in the UK include coordination, informal agreement, enforcement, and legality. Firstly, collusion is hard to coordinate among firms, especially as the number of firms increases. Secondly, collusion is an informal agreement, which can be broken at any moment and carries no legal consequences. As such, this threat of defection deters firms from entering into the agreement altogether given the possibility of undercutting by any of the parties involved. Thirdly, being an informal agreement between firms, collusion is difficult to enforce, in particular after any of the parties has broken the agreement. Finally, collusion is illegal in numerous countries including the UK. Competition law prohibits agreements or practices that restrict free trading and competition, bans abusive behaviour by dominating firms, and supervises mergers and acquisitions of large firms (Dolbear et al., 1968).

References

Blair, R.D. and Sokol, D.D. (2015) The Oxford Handbook of International Antitrust Economics, Volume 2, New York: Oxford University Press. Dolbear, F.T., Lave, L.B., Bowman, G., Lieberman, A., Prescott, E., Rueter, F. and Sherman, R. (1968) ‘Collusion in Oligopoly: An Experiment on the Effect of Numbers and Information’, The Quarterly Journal of Economics, vol. 82, no. 2, pp. 240-259.