Question

What stops oligopolists from acting together as a monopolist and earning the highest possible level of profits?

Short answer

Oligopolists are often unable to act together as a monopolist and earn the highest possible level of profits due to hindrances like legal issues, the temptation to cheat, disagreements on terms and conditions, a larger number of firms making coordination difficult, and product differentiation within the market. Anti-trust laws, firm strategies, and product offerings are some factors that contribute to these challenges and prevent sustainable collusion in oligopoly markets.

Step-by-step solution

1. Understanding the Oligopoly market structure

An oligopoly is a market structure in which a few large firms dominate the industry, with each firm holding a significant market share. The firms in an oligopoly are interdependent, meaning their decisions on pricing and production directly impact each other's profits. Barriers to entry are high, making it difficult for new firms to enter the market.

2. Collusion in Oligopolies

Collusion is an agreement between the firms in an oligopoly to act together to increase their profits. The most common form of collusion is price-fixing, where the firms agree to set prices at a certain level, thus eliminating competition and behaving like a monopolist. If oligopolists can successfully collude, they can earn monopoly-like profits by raising prices, limiting output, and enjoying higher profit margins on their products.

3. Factors that hinder collusion

Despite the potential benefits of collusion, several factors prevent oligopolists from acting like a monopolist: - Legal issues: Anti-trust laws and regulations aim to prevent collusion and price-fixing, which limits oligopolists from entering into such agreements. - Cheating: It can be tempting for an oligopolist to break a collusive agreement and undercut their competitors to gain market share. This distrust makes it difficult for firms to maintain collusion. - Disagreement: Firms within the oligopoly may not agree on the terms and conditions of the collusion. Different firms may prioritize different pricing strategies or target different customers, making it challenging to agree on a unified plan. - Number of firms: The more firms in an oligopoly, the more difficult it is to coordinate and maintain collusive agreements. - Product differentiation: If the products in an oligopoly market are not identical, it becomes more challenging for firms to agree on price fixing and other collusive arrangements.

4. Conclusion

While oligopolists have the potential to act together and earn monopolistic profits, various factors hinder them from doing so. The difficulty in maintaining collusion, the deterrence of anti-trust laws and regulations, and differences in strategy or product offerings make it challenging for oligopolists to act as a monopolist consistently and reliably.