Question

In an oligopoly market, business often desire to form cartels or engage in covert collusion with each other. However, this tends to be difficult to maintain. Briefly describe at least two of the reasons collusion tends to be unstable.

Answer 1

Reasons that show collusion tends to be unstable because -

• Breaking ranks - In oligopoly , the collusive oligopoly remains inherently unstable as the firms which are most efficient they tend to break the ranks by cutting the price level so as to increase the market share which makes the collusion unstable
• Considered as illegal - Since collusion is considered illegal therefore antitrust laws try to prevent the collusion in between the firms which makes it unstable
• Breaking of agreement - as the statement written in ques that in oligopoly market , business often desire to form cartel or engage to convert in collusion but sometimes after agreeing to collude they just break the aggrement by undercutting the profits which makes the collusion unstable