11.4 : Oligopoly and its Unfair Practices

An oligopoly, where market power is concentrated among a few entities, can lead to unfair strategies that disrupt the competitive landscape and reduce economic efficiency.

Unfair practices in an oligopoly can distort the market's natural competitive forces, leading to consumer harm. Such practices often include price-fixing, market division, collusion, predatory pricing, and product tying.

Price-fixing involves firms agreeing to sell at a set price above the competitive equilibrium, effectively acting as a joint monopoly. Output restrictions artificially inflate prices by limiting supply. Market sharing occurs when firms divide territories to reduce competition, each behaving as a local monopoly. Bid rigging involves firms colluding to determine the winner of a public tender process, undermining the competitive bidding mechanism.

Collusion occurs when firms in an oligopoly secretly agree to work together instead of competing, often leading to higher prices and less choice for consumers.

Predatory pricing involves setting prices below average variable cost to drive competitors out of the market, with the intention of raising prices once a dominant position is achieved.

Product tying happens when a company has market power for one product, and sells that product conditional on purchasing another product for which it does not have market power. This can limit consumer choice and reduce market competitiveness.

Understanding these strategies is essential for regulators who aim to preserve competitive markets. It is equally vital for consumers to advocate for and choose to support firms that engage in fair competition, thereby influencing market practices.This practice can be used to leverage market power from one market to another.