Oligopolistic Competition Case Study
Introduction
The Economic studies have found three main possible market structure : Perfect Competition, Oligopolistic competition and monopolistic competition. The neoclassical theory are based on the first market structure, the perfect competition, where firms have no market power and are defined price taker. Oligopoly and Monopoly constitute the counter case, where buyers and sellers have a market power such to influence the price, is the imperfect competition. In the modern history manifold firms have endorsed illegal strategies in order to obtain maximize their profit; through collusive behaviour, groups of firms define specific level of output and prices that will reduce the competitiveness of the market and will implicate higher overall prices. This illicit form of agreement is called cartel (European commission). Cartels are rewarded for setting lower level of output and higher prices, causing market inefficiency, leading consumers to pay more for less quantity. The truck producers' cartel is one of the most relevant cartel the EC has never detected, …show more content…
Referring to Figure 1, in a perfect competitive market, the total welfare is given by the sum of consumer surplus ( A+B+C) and produced surplus (D+E). Reducing the output and raising the prices to "Qm" and "Pm", from the competitive consumer surplus, B goes to the cartel and C is lost; the cartel gains B-E. The final outcome results in a dead weight loss of C+E.(Kerckchoff) The dead weight loss is the cost paid by the society created by the market inefficiency, the combination of a reduced output and higher price. The role of the EC is to improve the economic efficiency , and detecting collusive agreement is a crucial
The Economic studies have found three main possible market structure : Perfect Competition, Oligopolistic competition and monopolistic competition. The neoclassical theory are based on the first market structure, the perfect competition, where firms have no market power and are defined price taker. Oligopoly and Monopoly constitute the counter case, where buyers and sellers have a market power such to influence the price, is the imperfect competition. In the modern history manifold firms have endorsed illegal strategies in order to obtain maximize their profit; through collusive behaviour, groups of firms define specific level of output and prices that will reduce the competitiveness of the market and will implicate higher overall prices. This illicit form of agreement is called cartel (European commission). Cartels are rewarded for setting lower level of output and higher prices, causing market inefficiency, leading consumers to pay more for less quantity. The truck producers' cartel is one of the most relevant cartel the EC has never detected, …show more content…
Referring to Figure 1, in a perfect competitive market, the total welfare is given by the sum of consumer surplus ( A+B+C) and produced surplus (D+E). Reducing the output and raising the prices to "Qm" and "Pm", from the competitive consumer surplus, B goes to the cartel and C is lost; the cartel gains B-E. The final outcome results in a dead weight loss of C+E.(Kerckchoff) The dead weight loss is the cost paid by the society created by the market inefficiency, the combination of a reduced output and higher price. The role of the EC is to improve the economic efficiency , and detecting collusive agreement is a crucial