Give five examples of monopolies and collusion among sellers and their effects on the market economy.

to reduce the amount paid to suppliers. For example, a retailer with great buying power (Walmart, Amazon) can offer very small profit margins to suppliers as they have little alternative.Collusion between existing firms in an industry to exclude new firms from deals to prevent the market from becoming more competitive.Sticking to output quotas and higher prices.Collusive tendering. For example, ‘cover prices’ for competitive tendering in bidding for public construction contracts. This is when a rival firm agrees to set artificially high price to allow the firm of choice to win with a relatively high contract offer.Types of collusionFormal collusion – when firms make formal agreement to stick to high prices. This can involve the creation of a cartel. The most famous cartel is OPEC – an organisation concerned with setting prices for oil.Tacit collusion – where firms make informal agreements or collude without actually speaking to their rivals. This may be to avoid detection by government regulatorsPrice leadership. It is possible firms may try to unofficially collude by following the prices set by a  market leader. This enables them to keep prices high, without ever meeting with rival firms. This kind of collusion is hard to prove whether it is unfair competition or just the natural operation of markets.Problems of collusionCollusion is seen as bad for consumers and economic welfare, and therefore collusion is mostly regulated by governments. Collusion can lead to:High prices for consumers. This leads to a decline in consumer surplus and allocative inefficiency (Price pushed up above marginal cost)New firms can be discouraged from entering the market by types of collusion which act as a barrier to entry.Easy profits from collusion can make firms lazy and avoid innovation and efforts to increase productivity.Industry gets the disadvantages of monopoly (higher price) but none of the advantages (e.g. economies of scale)Justification for collusionIn times of unprofitable business conditions, collusion may be a way to try and save the industry and prevent firms from going out of business, which wouldn’t be in the long-term consumer interest. Dairy suppliers tried to use this justification in 2002/03 after problems from foot and mouth disease led to a decline in farm incomes.Research and development. Profits from collusion could, in theory, be used to invest in research and development.Milk price by supermarkets 2002-03After a period of low milk, butter and cheese

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a

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