competitive oligopoly
A competitive oligopoly is where the dominant firms actively compete rather than collude. Key features: (1) Firms avoid price competition because cutting prices triggers immediate retaliation — rivals match the cut, everyone earns less and nobody gains market share — the Nash equilibrium trap. (2) Competition therefore occurs predominantly through non-price means — advertising, branding, product innovation, loyalty schemes, quality improvements, and exclusive supplier deals. (3) Occasional price wars do break out — mutually destructive, typically ending when one firm exits or all firms tacitly stabilise at a new lower price. (4) Strategic behaviour governed by game theory — firms think several moves ahead anticipating rivals’ responses. Evaluation: non-price competition benefits consumers through innovation and quality improvements but heavy advertising spending may simply cancel out between rivals without creating real value, whilst prices remain above competitive levels due to avoidance of price competition.
collusive oligopoly
A collusive oligopoly is where dominant firms cooperate rather than compete — agreeing to fix prices, restrict output, or divide market share to collectively maximise profit as if acting as a single monopolist. Two forms: (1) Explicit collusion — a formal cartel where firms openly agree on prices and output e.g. OPEC restricting oil production. Illegal in the UK — CMA can fine firms up to 10% of global turnover, executives face criminal prosecution. (2) Tacit collusion — informal coordination without explicit agreement e.g. price leadership where rivals automatically follow the dominant firm’s price changes. Much harder to prosecute as no formal agreement exists. Evaluation: collusion produces the worst consumer outcome — monopoly level prices and restricted output without even the potential economies of scale benefit of a genuine monopolist. Competition authorities treat cartel behaviour as the most serious form of anticompetitive conduct.
Compare competitive and collusive oligopoly — key differences
Nature of interaction: competitive — firms actively fight for market share; collusive — firms cooperate to maximise joint profit. Pricing behaviour: competitive — prices rigid due to kinked demand curve, occasional price wars; collusive — prices fixed at monopoly level above competitive equilibrium. Non-price competition: competitive — heavy advertising, innovation, branding; collusive — less need to compete as market divided. Output: competitive — higher than collusive as firms try to gain share; collusive — restricted to maintain high prices. Consumer welfare: competitive — benefits from innovation and quality but prices above MC; collusive — worst outcome, monopoly prices, restricted output, no innovation incentive. Legality: competitive — legal; explicit collusion — illegal, tacit collusion — legal but monitored. Stability: competitive — stable Nash equilibria; collusive — inherently unstable due to cheating incentive. Evaluation: the distinction between competitive and collusive oligopoly is the single most important determinant of whether oligopoly is harmful or beneficial — competition authorities therefore focus primarily on detecting and preventing collusion rather than breaking up oligopolistic market structures per se.
