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Economics of Industry Essay 1 Essay topic: How Can Firms Collude in Practice? Matriculation Number: 0007927 Due Date: 16/12/2002 Word count: 2346 Table of contents Introduction 3 Forms of collusion 4 Cartels 4 Secret agreements 4 Tacit collusion 5 Conclusion 7 Bibliography 8 Appendix 1 9 Introduction People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in come contrivance to raise prices. - Adam Smith, 1776 In any oligopoly structure there is a conflict between individual incentives and joint incentives. In Bertrand competition, for example, each firm's individual incentive is to capture the whole market by setting lower price than its rivals. That leads to pricing at marginal cost and zero profits earned by all the firms. This equilibrium is not desirable by any of the firms - their joint incentive is to earn positive profits by fixing price at some other, higher than marginal cost level. Because of this Prisoner's Dilemma nature of any oligopoly structure, in equilibrium firms...

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