Competition vs Collusion
Firms constantly make decisions about how to compete and maximize profits. Should they fight for customers by lowering prices and improving products, or should they work together with competitors to control the market? This chapter explores the impact of competition and collusion, including how monopoly power emerges when firms collude and whether competition among oligopolies benefits consumers. By using real-world examples, we will analyze how these strategies affect markets, businesses, and consumers.
1. Competition vs. Collusion
Firms operate in different types of markets. In some industries, firms compete aggressively, while in others, they may secretly or openly work together.
Competition occurs when firms act independently to attract customers. They do this by lowering prices, offering better products, or investing in marketing.
Collusion happens when firms coordinate to reduce competition, such as setting higher prices together or agreeing to limit production.
Understanding how these strategies work is important for analyzing business behavior and market efficiency.
2. Monopoly Power When Firms Collude
2.1 What is Collusion?
Collusion allows firms to act like a monopoly by working together rather than competing. There are two main types:
Explicit Collusion: Firms make a formal agreement to fix prices, control supply, or divide the market. This is illegal in many countries.
Tacit Collusion: Firms do not sign any agreements, but they follow each other’s pricing and market decisions to avoid direct competition.
2.2 Why Do Firms Collude?
Firms prefer collusion for several reasons:
Higher Profits: By keeping prices high, firms can increase their earnings.
Avoiding Price Wars: Intense price competition can lead to losses for all firms.
Market Stability: Collusion reduces uncertainty about competitors' actions.
2.3 Real-World Examples of Collusion
Many industries have been caught engaging in collusion:
OPEC (Oil Cartel): The Organization of the Petroleum Exporting Countries controls oil prices by coordinating production levels among member countries. This impacts global fuel prices.
Airline Price Fixing: British Airways and Virgin Atlantic secretly agreed to raise fuel surcharges, leading to heavy fines.
European Truck Cartel: Truck manufacturers like Daimler and Volvo were fined €3 billion for agreeing to keep truck prices high from 1997 to 2011.
2.4 Impact of Collusion on Consumers
Collusion harms consumers in several ways:
Higher Prices: Customers pay more than they would in a competitive market.
Less Innovation: Without competition, firms have little incentive to improve products or services.
Reduced Market Efficiency: Artificially high prices lead to wasted resources and economic inefficiencies.
3. Does Competition Among Oligopolies Benefit Consumers?
3.1 What is an Oligopoly?
An oligopoly is a market where a few large firms dominate the industry. These firms are highly interdependent—meaning one firm’s decision affects the others. Examples of oligopolies include:
Telecommunications (Singtel, StarHub, M1 in Singapore)
Technology (Apple, Microsoft, Google, Amazon)
Automobiles (Toyota, Volkswagen, Ford, Hyundai, Tesla)
3.2 When Competition is Good for Consumers
In some cases, competition benefits consumers:
Lower Prices: Firms compete by reducing prices (e.g., Singapore’s telecom price wars led to cheaper mobile data plans).
Better Quality & Innovation: Companies invest in research to improve products (e.g., Apple and Samsung’s competition drives smartphone advancements).
More Choices: Competition leads to more product variety (e.g., Grab, Gojek, and ComfortDelGro offering different ride-hailing services).
3.3 When Competition Can Harm Consumers
However, intense competition can sometimes hurt consumers:
Price Wars Can Lead to Market Exit: If prices fall too low, some firms may go out of business, reducing long-term competition (e.g., Uber leaving the Southeast Asian market due to losses).
Predatory Pricing: Large firms temporarily slash prices to eliminate smaller rivals before raising them again (e.g., Amazon’s discounting strategies in retail).
High Marketing Costs: Firms may spend more on advertising than on improving products, creating artificial brand loyalty (e.g., Coca-Cola vs. Pepsi).
3.4 Case Study: Budget Airlines in Europe
The European airline industry provides a great example of both the pros and cons of competition:
Positive: The rise of budget airlines (Ryanair, EasyJet) forced traditional airlines to lower ticket prices, making air travel more affordable.
Negative: Mergers among larger airlines (e.g., Lufthansa acquiring smaller carriers) have reduced competition on key routes, leading to higher fares.
3.5 Why is Collusion Illegal?
Higher Prices for Consumers
Firms set artificially high prices, reducing affordability for consumers.
Reduced Competition
Collusion eliminates price wars and discourages innovation and efficiency.
Lower Consumer Choice
Fewer competing firms mean fewer options for consumers.
Market Inefficiency
Instead of competing to lower costs, firms rely on mutual agreements to keep profits high.
Real-World Example: The Airline Price-Fixing Scandal
In 2015, major airlines (including British Airways and Virgin Atlantic) were fined millions for secretly coordinating fuel surcharges, causing passengers to pay more.
3.6 Are There Any Legal Forms of Collusion?
✅ Joint Ventures: When companies collaborate on specific projects (e.g., R&D partnerships) without harming competition.
✅ Government-Approved Cartels: Some industries (like OPEC) operate legally under special international agreements.
4. Conclusion
Firms in oligopolistic markets must decide whether to compete or collude. Collusion creates monopoly-like power, leading to higher prices and lower innovation. Competition can benefit consumers through better prices and innovation but may also lead to aggressive price wars and market instability. Governments often intervene to prevent collusion and maintain fair competition.
Discussion Questions
Why do some firms prefer collusion over direct competition?
Can you think of an example where price competition has helped or harmed consumers?
Should governments intervene more in industries where collusion is likely? Why or why not?