Collusive vs Non-Collusive Oligopoly: Difference and Comparison

Key Takeaways

1. Collusive Oligopoly: Firms cooperate to maximize joint profits through agreements or collusion.
2. Non-Collusive Oligopoly: Firms compete independently without explicit agreements.
3. Difference: Collusive oligopolies involve cooperation, while non-collusive oligopolies involve independent competition.

What is Collusive Oligopoly?

A collusive oligopoly can be defined as a formal or informal agreement among oligopolists or firms to avoid competition among themselves. Collusive oligopoly names arise from the term collusion, where the firms acting independently experience competition in the price of their products. Thus, similar firms form a cartel or price leadership to tackle such uncertainty and competition to grow together.

The collaboration among the firms can be of two types, i.e., cartel or price leadership. The cartel is an output of collaborating independent firms within the same industry. The cartel members follow standard marketing policies to maximize profit, output, sales, and distribution. Product leadership is another form of collusive oligopoly in which the experienced or dominant firm becomes the price leader and fixes the price of products.

Working as a single firm allows all the firm members to gain maximum output. Generally, such coagulation helps maximize joint profit, avoid price wars, and build a strong business group. But, collusive oligopoly or monopoly formation is considered illegal in some countries. Hence, the firm owners sign a secret or tacit agreement rather than an open agreement in these countries.

What is Non-Collusive Oligopoly?

Non-collusive oligopoly is a competitive market where firms in the same niche compete to gain maximum market share. The firms in the non-collusive oligopoly are independent; hence, they decide the price, profit margin, and output policy independently. Each firm in the business aims to gain maximum profit by implementing its strategies.

Newer firms can quickly enter the business with limited barriers, as the firms operate individually in a non-collusive oligopoly. But, they must follow strict government guidelines to stay legally in the business. Non-collusive oligopoly offers severe competition among the firms; hence, individual firms start with a specific strategy without colluding with others. Primarily, these firms focus on creating a brand through aggressive advertising and marketing tactics.

In a non-collusive oligopoly, the decisions made by the firms are independent. But, the decision-makers follow up on the existing larger firms and their decisions to make the best decision. They look at the price range set by these firms to establish a competitive and affordable price for the consumers and simultaneously make sufficient profit.

Difference Between Collusive Oligopoly and Non-Collusive Oligopoly

1. A collusive oligopoly is a formal or informal agreement among sellers to avoid competition in the market. On the other hand, non-collusive oligopoly refers to firms performing and competing independently in the market with their price and output policy.
2. A collusive oligopoly welcomes the formation of cartels or price leaders for the cooperative business. At the same time, a non-collusive oligopoly prefers competition for profit maximization.
3. In a collusive oligopoly, the price and output decisions are mutually made by cartel members. While in a non-collusive oligopoly, price and output decisions are made by individual firms.
4. Collusive oligopoly forms a monopoly market; hence, cartels control the policies and prices. Non-collusive oligopoly doesn’t create such markets.
5. In a collusive oligopoly, the firm’s decisions are interdependent in the cartel. On the other hand, in a non-collusive oligopoly, the firm’s decisions are independent of others.

Comparison Between Collusive Oligopoly and Non-Collusive Oligopoly

Parameter Of Comparison	Collusive Oligopoly	Non-Collusive Oligopoly
Objective	To avoid competition in the market.	To work independently and maintain competition in the market.
Interdependency	Firms are interdependent on other members of the cartel.	Firms are independent with their decisions.
Profit	Collective	Individual
Price Benefits	Due to monopoly, consumers get lesser price benefits.	Consumers receive better price benefits due to competition among the sellers.
Brand Loyalty	No need for brand loyalty.	Advertisement and marketing tactics are required to build brand loyalty.

References

1. https://link.springer.com/chapter/10.1007/978-1-349-16077-8_9
2. https://link.springer.com/chapter/10.1007/978-1-349-16077-8_10

Last Updated : 08 August, 2023