Question

Little Kona is a small coffee company that is considering entering a market dominated by Big Brew operating as an oligopolist. Each company's profit depends on whether Little Kona enters and whether Big Brew sets high price or a low price.

If the two firms could collude and agree on how to split the total profits, how would they and consumers benefit from that decision?

Answer 1

            The given case seeks an analysis on the market entry barriers that a smaller firm has to face in an oligopolistic market and how a collusion of the existing firm and the new firm could bring benefits to the consumers of the market. As its known, an oligopoly market refers to such a market where a few firms would dominate the market and thus holds the market structure of the economy. The following are the disadvantages of such a market structure

· Reduced consumer choices and higher concentration in the market

· Increased prices for the consumers in the market

· Lack of competition which allows the few firms available to manipulate the market which would have negative effects on the consumers

· Barriers to market entry for smaller fellow competitors which could harm the balance of the market structure

                                         The following are the types of collusions that could be established in an oligopolistic market

· Overt collusion where the firms would form trade associations and the agreements made are not hidden

· Covert collusions where the firms would try to hide their agreements and details to avoid the regulator detections while fixing prices

· Tacit collusion where there are no formal or informal agreements and the firms continue to work together without any visible restrictions on them

The following are the reasons why the consumers could benefit from the collusion of the incoming smaller coffee company, Little Kona and the existing oligopoly giant Big Brew

· With collusion, there would be a mixing of price ranges and this could result in reduced prices for the consumers

· With more competition available, the product ranges could also vary which could benefit the consumers by getting better and wide products

· It could help in establishment of market stability which could bring fair practices in the market sales.

· It could lead to financial stability which could improve the consumption behaviours of the consumers.