Question

In many oligopolistic industries, the same firms compete over a long period of time, setting prices and observing each other's behavior repeatedly. Given the large number of repetitions, why don't collusive outcomes typically result?

Short answer

Collusive outcomes don't typically result in oligopolistic industries due to the lack of trust among firms, legal repercussions of collusion, and firms' focus on short-term profits over long-term agreements.

Step-by-step solution

Understanding the Concept of Oligopoly

An oligopoly is a market structure where a few firms have most of the market share. They are price setters rather than price takers. These firms commonly produce similar products which are not perfect substitutes. Therefore, the pricing strategy of each firm directly affects the others.

Insight on Collusion

Collusion occurs when firms decide to cooperate with each other for their mutual benefit, often at the expense of consumers. They agree to control the price and the output of their products in the market which will eventually lead to an increase in their profit margins. Despite being illegal in most nations, it is tricky to prove collusive behavior.

Barriers to Collusive Outcomes

The main reasons why collusive outcomes don't typically result are: firstly, there might be a lack of trust among the participating firms which causes them to suspect that the other firms may betray them and break the agreement to gain a larger market share. Secondly, there is a risk of being penalized by legal authorities as collusion is illegal in many countries. Lastly, the firm's focus on short-term profits might discourage them from keeping collusive agreements that generate more significant profits in the long run.