Why might price collusion occur in oligopolistic industries? Assess the economic desirability of collusive pricing. What the main obstacles to collusion? Speculate as to why price leadership is legal in the United States, whereas price fixing is not.

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What are

oligopolistic industries?

price collusion?

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Price collusion can occur in oligopolistic industries due to the nature of these markets. Oligopolies consist of a small number of dominant firms that have significant market power. The firms in such industries usually engage in strategic interactions, where they are aware that their actions can directly influence the behavior and profits of their competitors.

Economic desirability of collusive pricing can be assessed from two perspectives: from the firms' point of view and from a societal standpoint. From the firms' perspective, collusive pricing can lead to increased profits by avoiding price competition and maintaining higher prices. This can benefit the firms involved as they can enjoy stable profits in a coordinated manner, which is preferable to uncertain and potentially lower profits under competitive conditions.

However, from a societal perspective, collusive pricing is generally considered undesirable. It reduces consumer welfare as it leads to higher prices and limits choices for consumers. It also hampers innovation and allocative efficiency since firms have less incentive to improve and compete on factors other than price.

There are several main obstacles to collusion. Firstly, trust among firms is crucial for collusion to occur. Without trust, firms may cheat and undercut the agreed-upon prices. Secondly, it is difficult to maintain coordination and enforce agreements as there are legal risks and a lack of transparency. Moreover, the presence of new entrants or potential substitutes can disrupt collusive arrangements. Finally, governmental regulations and antitrust laws aim to discourage collusion and penalize anti-competitive behavior, which acts as a strong deterrent.

In the United States, price leadership is legal, while price fixing is not. Price leadership occurs when a dominant firm sets the price, and other firms in the industry follow suit. This practice is generally deemed legal because there is no explicit agreement or coordination among the firms to fix prices. Instead, it is seen as a result of the market dynamics and the firms' responses to the price leadership of the dominant firm.

Price fixing, on the other hand, involves explicit agreements between firms to set prices at a certain level, limiting competition and harming consumers. Price fixing is illegal in the United States under antitrust laws, which are designed to promote competition and prevent anti-competitive behavior. The rationale behind this distinction is that price leadership is seen as a natural market phenomenon, while price fixing directly undermines competition and consumer welfare.