Economics

Question 1

As most industries are getting more concentrated, the companies opt to sign anti-competitive arrangements to regulate competition. Such an arrangement between competing businesses is referred to as a cartel. The agreement may be in writing or just verbal. The cartels may be beneficial to the organizations, but they harm the consumers in urbanized communities and emerging countries. Industrial sectors that are cartelized experience reduced competitiveness. It affects a country’s economy’s general performance as the rate of productivity decreases, stagnant salaries, higher rates, and the gulf between dominant and struggling businesses widens. Besides, it equips leading firms to prevent potential competitors from emerging and expanding in the industry. For example, the airlines and pharmaceuticals sector.

Question 2

The widespread forms of cartels conducted by businesses are output regulation, price-fixing, bid-rigging, and market sharing. Price fixing occurs when two competing companies agree to fix, control, and maintain their products’ prices. It may be in the form of an agreed minimum price, agreed pricing technique, or a common reimbursement and credit terms. Market sharing is an arrangement between competitors to split the market to reduce competition. In bid-rigging, the competitors agree not to compete fairly with each other for certain tenders. The common bid-rigging methodologies cover bidding, bidding suppression, bid withdrawal, bid rotation, and non-conforming bids. When competing companies agree to limit the volume of products they avail in the market, it is termed as an output control.

Question 3

Most firms collude to control the market, rather than letting the market forces direct them. Price fixing allows them to agree on a common price range for their products while output restriction creates product scarcity allowing them to increase the prices. The firms also shield themselves from the competition by distributing customers by their geographic region, splitting contracts, and agreeing not to compete for established clients. The companies may also agree not to produce similar products or to explore each other’s market. It ensures that these companies have the upper hand in the market, and they control product pricing and flow at the expense of the consumers who have limited options to choose from.

Question 4

Most of the price control, output regulation, and market sharing arrangements collapse with time. One of the reasons is that the waning demand results in excess hold up stock in the industry. The second reason is the interruption caused by the emergence of non-cartel companies in the industry. It creates new competition. Thirdly, the government has established policies against anti-competitive traits and is issuing rewards to the whistleblowers. The disclosure of the price controlling cartels by government agencies, such as the United States Justice Department, to the public breaks down the cartel behavior. Lastly, over-production forces companies to break the price control agreement. In that, excess output lowers the prices and the profits. These agreements are only applicable when there are few companies in the industry. There are hindrances for entering the industry. It is easy to monitor the company’s output, and the market demand is constant.

Question 5

There are contradicting opinions on how cartels should be defined and detected, and what techniques should be used by competition authorities to counter cartels that are destructive to the nation. Extreme anti-competitive mannerisms are exploitative to the consumers and are often covered-up. Competition authorities use different techniques to gather the required evidence relevant to ending these manipulative practices, depending on their country. Information technology has brought about globalization, which has brought about a new set of challenges for the competition authorities. The United States has established government agencies like the Office of Fair Trading, the US Justice Department, and the EU competition commission to end cartel practices. These agencies have enacted policies to govern fair and competitive practices, and are giving rewards to ‘whistleblowers.’ Some of the competition laws are such: the prohibition against fixed prices by having a common minimum price list, and the prohibition against limiting production to increase prices. They aim to eliminate anti-competitive behavior, promote the consumers’ welfare, and enhance the country’s growth through various industries’ competitiveness. The consumers will benefit from healthy competition between firms through lower prices and better options and quality products.

Question 6

For effective cartel busting, huge fines have to be put in place, and the probability of them getting caught increased. The United States government has spent huge sums of money on shaping and executing the competition regulations. Recent encounters show that competition laws have been successful in identifying cartels. However, it is difficult to track the effect of illegal anti-competitive practice because of a lack of tools.

Question 7

An oligopoly is a market structure in which a few firms dominate the industry. These companies are interdependent, and their choices rely on the behavior of other firms. In case a company increases its prices, they stand to lose their revenue, and if they reduce their prices, they are more likely to increase their market share. However, other companies would not allow this to happen. They will counter it by also reducing their prices. Both the upcoming and mature industries are prone to this type of interdependence. It is challenging for them to settle down into a constant steady-state as they risk losing their consumers. Changes in demand disrupt companies’ status quo and force them to modify their volumes and products continuously. Not only are companies uncertain about the evolution of demand, but they are also uncertain about the decisions of their competitors. Deceit is possible in an oligopoly if outputs and costs are monitored; there is effective communication; there is a dominant company that can influence the pricing, and hindrances to entry into the industry. Some oligopolies compete based on the quality of their products, while others compete on price.

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