Evaluate the view that only producers, and not consumers, benefit when oligopolistic firms collude to try

to reduce the uncertainty they experience (25 marks)

An oligopoly is a market structure in which several firms dominate a market by holding a large proportion of the market share and so to an extent hold some monopoly power by which they are able to set prices. As a result of this there is a level of interdependence on each other in order to set a price in which to gain the maximum possible profit. The interdependence that is present aims to create a level of price stability that allows confidence and growth. A means of doing this is a cartel, which although is illegal in the UK, US and other countries, does exist in the form of OPEC. Within an oligopoly there is uncertainty based on how other leading firms will react to a given situation, as a result the other leading firms will have to make decisions based on assumptions. This can be shown in the form of the game theory. Game theory can be applied to the behaviour of firms in the form of decisions of whether to invest in new capital, increase the marketing budget or change the prices as there are risks as to whether other firms may not follow in raising price or other situations- although it may give the firm a competitive edge in the market it may result in a long term loss or decline of the market share. To reduce this uncertainty collusion may occur in order to ensure price stability in the market, whilst also allowing joint profit maximisation by the formation of a cartel. A cartel is a group or organisation of firms which aims to raise price by restricting output, consequently this also allows for increased profits. Within a cartel the market may be divided up according to the market share of the given firm within it and so the leading firm changing every so often and setting a price which the other firms will see as a reflection of the market. This may reduce the level of uncertainty because the firm is aware of what other its other rivals (so to speak) are doing with their market share and the prices are set in agreement. However, the extent of collusion working without cheating will depend on how close it is to each individual firms profit maximisation output level. Collusion can provide benefits for the consumer as well as the producer; however, this will be dependent on the type of collusion: If it acts in the interest of the consumer e.g. firms colluding so to set a quality of the product that is to be sold. However, more often than not firms will act in their best interest so to gain maximum possible profits at the expense of the potential consumer surplus. Consumers may gain from price stability- this is also true to the producers as this allows for higher levels of confidence as a result the consumers may be more inclined to spend; the producers will have a greater knowledge of spending patterns; this could result in greater levels of research and development which could further increase profit margins whilst simultaneously allowing an improvement in the quality of the good for consumers. Moreover, it can be argued there may be a reduction in externalities- there could be a reduction of wasteful costs in advertising and marketing if producers co-operate rather than compete against each other- this could well reduce the level of visual pollution. It can also be said that there would also be a guaranteed supply from the producer cartel- although at a higher price than preferred; however if the demand within the market is inelastic this shouldnt be a problem. However, the consumers are more likely to experience the costs of a cartel for example the reduction of the level of consumer surplus as a result of the joint profit maximisation and so can be seen as a way of exploiting consumers.

Evaluate the view that only producers, and not consumers, benefit when oligopolistic firms collude to try to reduce the uncertainty they experience (25 marks)
In regards to the cartel, they are likely to experience the most benefits as it can allow for a maximisation of profits, however this is unlikely as the firms may be forced to recognise an output level that benefits all of the firms that are part of the cartel. It can be suggested that the collusion may lead to productive efficiency where economies of scale can be exploited as it may be forming at the minimum average total cost. This can allow for more money gained from profit margins to be spent on research and innovation so to ensure a competitive edge remains in the long run. As aforementioned it can reduce the level of externalities to the product as resources are allocated in an efficient way e.g. reduced advertising costs, shared use of the same technology. As I have previously mentioned it will easier for firms to plan their spending due to greater information. Conversely, there may be some disadvantages to the producer- it could potentially reduce the level of innovation as there is less incentive (large proportion of the market share and gaining large profits) which in the long run may gradually reduce the market share, particularly if smaller firms research into new methods which may reduce costs of production further. It is an illegal practise there is a fear of government intervention or cheating, this may not eradicate uncertainty completely as firms may not be reaching their profit maximisation output- and so the cheating may come at a cost to other leading firms. Furthermore, it may reduce the level of competition within an economy, which from the global perspective may not be desirable. In conclusion, the extent to which consumers will benefit from collusion will be dependent on the motives behind it and the stability behind a cartel. There is a likelihood that there will be cheating so increasing uncertainty. However, in regards to both the consumers and producers there are disadvantages to both, but, cartels (due to the assumption of rational behaviour) will hold more benefits.