Difference Between Collusive Oligopoly and Non-Collusive Oligopoly

Edited by Diffzy | Updated on: May 14, 2023

       

Difference Between Collusive Oligopoly and Non-Collusive Oligopoly

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Introduction

Having a proper definition of the market might give rise to bogus thinking. But when it comes to market determination, there is only one definition recognized by economic experts: a market is an area where supply and demand are represented. The outcomes of supply and demand might be seen in several market layouts. Different types of markets include those featuring perfect competition, monopolistic competition, monopoly competition, and oligopoly competition. The sole market whose demand curve cannot be determined amongst all of the distinct market structures is an "oligopoly market". Every market structure, with the possible exception of oligopoly, has a demand curve that may be either elastic or non-elastic. There are just a couple of large market enterprises in an oligopoly market. Even certain costly manufacturers like BMW and Audi have been represented by these businesses; this makes them not just ordinary businesses. Every industry, not only the automobile one, includes a few brands that consumers regard as something of a luxury. As time passed, these companies have transformed their names into brands, and these companies have established an excellent track record in the marketplace. Because of several restrictions and fierce competition, the introduction of new enterprises is exceedingly challenging.  There will already be competitors in the market if an upcoming business enters it. It will be incredibly challenging to establish a name and woo consumers away from established companies. 

Collusive oligopoly vs Non-collusive oligopoly

It is impossible to determine the demand curve for collusive and non-collusive oligopolies alike. The creation of cartels is the most important distinction that can be observed between collusive and non-collusive oligopolies. In contrast to non-collusive oligopolies, which discourage such formations, collusive powerful companies involve the formation of cartels. Coordination and helping hands can be the second distinction. As opposed to non-collusive ones, collusive oligopolies are cooperative. Coordination is essential when there are few large enterprises. Profit maximization is a crucial difference after that. Maximizing revenues should be the number one goal of every business, there isn't any doubt regarding that. Only collusive oligopolies understand that, but profit maximization solely ought not to serve as the sole consideration. Profit is the single consideration in a non-collusive oligopoly. In contrast to non-collusive oligopolies, whose members are self-centered and mainly concerned with the well-being of the individual, collusive oligopolies attempt to achieve the profit of all members of the cartel.

Difference between collusive oligopoly and non-collusive oligopoly in tabular form

Parameters of comparisonCollusive OligopolyNon-collusive oligopoly
MeaningIt is a type of oligopoly in which a few big firms come together to take a cooperative decision to avoid competition.Non-collusiveoligopoly is one in which those few forms follow their price and are independent of their rival firms.
ProfitCollusive oligopoly aims at joint profits.Non-collusive oligopoly aims at an individual profit.
Level of competitionThe level of competition is reduced when firms take cooperative decisions.There is cutthroat competition in non-collusive oligopoly. Every firm aims at increasing its market share.
NatureThe collusive firm disposition is cooperative.The non-collusive firm disposition is non-cooperative.
Formation of cartelsCartels are formed in a collusive oligopoly only. Cartels are not formed in a non-collusive oligopoly.
DependencyIn collusive oligopoly firms are dependent on each other or one price leader for the decisions.In a non-collusive oligopoly every firm is independent of its rival and completion is increased by increasing or decreasing price or output.

What is a collusive oligopoly?

The term "collusive" alludes to a collision in which individuals band together to get an edge over one another. Therefore, a situation when a corporation enters into cooperation and makes decisions regarding output and price in the most advantageous interests of everyone is often referred to as a collusive oligopoly.No individual or firm can increase or decrease the price or output under a collusive oligopoly. The primary objective of a collusive oligopoly is to produce shared profits through cooperative efforts for the company engaging in the same line of activity. By performing acts that would be beneficial to all participants in the agreement, they strive to lessen market competition. The cartel is the agreement in this context. The individuals who entered the cartel do so as members, and they consent to the conditions that would be advantageous to all of the members.

Two models come under collusive oligopoly which is as follows:

  • Cartel formation model
  • Price leadership model

Cartel formation model

The literal meaning of the word cartel is the cooperative arrangement to reduce price competition. It is an association that works in the favor of manufacturers and suppliers by maintaining prices and cutting down the cutthroat competition in the market. Cartels can be formed formally or informally. The formation of cartels not only reduces the competition in the market but also brings cooperation among marketers. They have a sense of belongingness. All the sellers and manufacturers follow the same price and output as decided in cooperative agreements all over the world. They fixed the price and out for everyone. With tacit understandings among each other, they try to form a monopoly in the market among those who are out of the agreement. They work as a single monopolist and earn joint profits. They earn profits as a monopoly. The most well-known cartel of all time is "OPEC". OPEC stands for the Organization of petroleum exporting countries. OPEC was formed by the world's leading petroleum countries to have a global impact on the market and earn maximum profits.

Price leadership model

The price leadership approach aids in stabilising prices that are consistent with the current condition of the market. Price leadership is characterised by economists as a leader who is the overpowering firm in the market. Every other organisation was obligated to accept and adhere to the leader's proposed prices.The leader organization can be chosen exclusively by the members of the market situation itself given the spontaneous leader according to the situation of the market. This model is widely followed in the world as in most of the countries formation of cartels is considered illegal. Price leadership can be of many different types such as dominant price leadership, aggressive price leadership, or barometric price leadership. Under the price leadership model, the rest of the firms follow the leader.  The leader decides the price and all the firms have similar yields. Sometimes the leading firm not only determines the price for the cartel but also makes policies for the whole cartel.

What is a non-collusive oligopoly?

A noncollusive oligopoly is one in which firms are independent of their rivals.  Firms proceed with their prices, outputs, and policies. Firms do not collude to form cartels and have the maximization of profits. Non-collusive oligopolies have to bear cutthroat competition in the market.  There is aggressive competition among rival firms through advertisements.  One such classic examples are "Coca-Cola and Pepsi ". Both have homogenous products with an identical price range which made them close substitutes for each other.  If one firm cut down its price then another firm is also forced to lower the price. If other firms do not lower their price then they will lose a portion of their customer segment to their rival firm which is selling at a lower price. So the firms are independent in deciding the prices for their products and it will have an impact on their rival firms.

Like collusive oligopoly non-collusive oligopoly do not form cartels but it too has some models which are as follows:

  • Cournot Model
  • Bertrand Model
  • Stackelberg Model

Cournot Model

The Cournot model was formulated by the French mathematician "Augustin Cournot". This model is also known as Cournot's competition economic model. This model applies to those firms that cannot come to a cooperative decision and are not able to form cartels. The model has an assumption that if we changed the output or the prices of the product our rival firms will remain at the same level.  We move on by assuming that our competitor's prices will remain constant irrespective of the changes in market dynamics. Output is the main element in the Cournot-competition model. The firms frame their policies and output levels based on the strategies of their competitors. Firms frame their strategies to equip the market share of their competitors.

Bertrand Model

Bertrand's model was named after Joseph Louis Francois Bertrand. It describes the firm's actions based on prices. When firms dealing in a homogenous product set their prices for a particular amount, customers are drawn to the quantity at that given price. The comparison is done based on prices in this framework. The firm chooses the price at which to sell based on its segmentation of the market and its effectiveness. This model assumed that rival firms will keep the prices constant for their creations.  But in the real world, there are lots of rivals who might have had an impact on the growth of our company and sales. Due to the homogeneity of the items, the opposing firm can cut its prices to win over a portion of the consumer base.  Customers are easily influenced by decreased pricing since the items in question are homogenous and close substitutes for others to choose from. Since items are homogenous as an entire thing, any company could meet market demand on its own.  

Stackelberg Model

Heinrich Von Stackelberg is the originator of the Stackelberg model. Output is the main component in this model. The remaining members of the followers and the one leader are represented in this model. In advance of accomplishing anything else, the leader decides the production process be sold at a price determined by him within the marketplace and looks for ways to generate a profit in that market environment. The rest of the followers are going to pursue the same course if the leader is fortunate.

Their leader is going to decide the prices, and they will set the prices for the goods accordingly.  Following this paradigm, there is a leader-follower connection. In this approach, the one in charge always benefits from being the first to take action. The first course of action may out to be the best one in certain cases, but not always.  The major goal of every business is to maximize profits and to achieve this goal, it is considered that the company possesses all necessary market knowledge. However, as a result of the market's constant fluctuation, one cannot have access to all information at all times.

Difference between collusive oligopoly  and non-collusive oligopoly (in points)

  • Market-based oligopolies can be both collusive and non-collusive.  The primary distinction between a collusive and non-collusive oligopoly is the fact that the former is cooperative.
  • Collusive oligopoly tries to remove the competition from their fellow rivals whereas non-exclusive oligopoly increases the competition in the market.
  • Collusive oligopoly is dependent whereas non-collusive oligopoly is independent of their rivals.
  • The level of competition is lower in a collusive oligopoly whereas the competition in a non-collusive oligopoly is very cutthroat.
  • Collusive oligopoly aims at the profit maximization of firms as a whole whereas non-collusive oligopoly only aims for the individual profit of the firms.
  • Collusive oligopolies don't incur unnecessary expenses on advertising or public whereas non-collusive oligopolies incur heavy expenses on the advertisement to lure customers.

Conclusion

Following everything that has been said above, it may be ruled that both collusive and non-collusive oligopolies are going to stay in the market.  Whether rivals want to form cartels or want to outbid one another depends on the product and the government's oversight of the market. Different kinds of frameworks are demonstrated by collusive and non-collusive oligopolies. However, given the number of ups and downs in the market, these models cannot always be accurate.  Market swings are frequent. In the context of the real market, the assumptions proposed by Cournot, Bertrand, and Stackelberg are not necessarily accurate. Concerning market expectations, the reality is drastically distinct. Similar to the fierce rivalry between Coca-Cola and Pepsi, there are plenty of companies where this is indeed the case. Businesses can achieve their goal of generating profits by using proper market knowledge to acquire customers. The oil and natural gas industries are instances of collaborative businesses that collaborate.  The same interest rates for gases and petroleum goods were followed globally thanks to cartels they had established.  They have shown that profits from similar goods can be generated, and that too on a very big scale and without rivalry.


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"Difference Between Collusive Oligopoly and Non-Collusive Oligopoly." Diffzy.com, 2024. Wed. 28 Feb. 2024. <https://www.diffzy.com/article/difference-between-collusive-oligopoly-and-non-collusive-oligopoly-1344>.



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