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.

Oligopolies, a market structure dominated by a few firms, pose challenges to fair competition and consumer welfare. Practices like collusion, price-fixing, market division, predatory pricing, and tying are associated with this market structure.

Collusion involves secret cooperation among competing firms to influence market conditions. For example, major oil-producing nations work together to control oil prices through OPEC.

Price-fixing is another practice where firms agree on specific prices, as seen in the LCD panel case involving companies like LG and Samsung.

Next, market division occurs when competitors agree to divide territories, as observed in the airline industry, where carriers manipulate routes and prices.

Predatory pricing is about setting low prices to eliminate competition, as demonstrated in the legal dispute between Uber and the San Francisco taxi firm Flywheel.

Lastly, tying involves selling two products together, with one not available for sale individually, as seen when Microsoft included Internet Explorer with Windows.

These practices hinder competition, leading to higher prices, limited choices, and reduced innovation.

• Oligopoly - Concentration of market power among a few entities.
• Price-Fixing - Firms agree to sell at a set price over competitive equilibrium.
• Market Division - Firms divide territories to reduce competition.
• Collusion - Firms secretly agree to work together leading to higher prices.
• Predatory Pricing - Setting prices low to drive competitors out, then raising prices.

• Define Oligopoly – Explain the concentration of market power (e.g., Oligopoly).
• Contrast Price-Fixing vs Market Division - Explain key differences in these unfair practices (e.g., setting prices over competitive equilibrium vs dividing territories).
• Explore Examples of Collusion – Describe its effect on consumers (e.g., leading to higher prices).
• Explain Methods of Predatory Pricing – Describe how it eliminates competition.
• Apply in Context of Market Regulation – Discuss how understanding these strategies is vital for market regulators.

• What is an oligopoly and how does it disrupt the competitive landscape?
• What are some unethical strategies used in an oligopoly?
• What is predatory pricing and how does it affect the market?

• Regulators – Helps foresee market disruptions and establish proactive measures.
• Economists – Provides insight into market dynamics and pricing strategies.
• Business Students – Offers a contextual understanding of oligopoly and its impacts.
• Consumer Advocacy Groups – Helps foresee market disruptions and unfair pricing structures.