4.2.1 Market failure


    Overt collusion – when two or more firms make a formal agreement to work together on                            something e.g. price-fixing.


    Tacit (collusion) agreement – when there is no formal agreement, but firms have implied                                                and seem to be working together.


    Collusive behaviour is more likely to happen in an oligopoly, where there are few dominant firms so one is less likely to disagree. It leads to a lower consumer surplus, higher prices, and greater profits for the firms involved. The factors that make a firm more likely to collude are: similar prices, high barriers to entry, ineffective competition policy and customer inertia.


    A cartel is a group of two or more firms that have agreed to limit output, increase prices or prevent entry of new firms. An example of a cartel would be OPEC who controlled 70% of the world’s oil supply.


    Restrictive practices – any actions a business takes to restrict/limit fair and open                                                  competition


    The following are some restrictive practices:

    • Restricting supply and increasing prices
    • Market rigging
    • Price fixing
    • Bundling (one product comes with another, reducing competition as consumers are less likely to replace it – browser and OS are sold together)
    • Resale price maintenance (retailers will discount prices of goods)
    • Tie in sales (when to stock one product, a company must stock the whole range)


    Monopsony power – a market with one dominant buyer (similar to a monopoly but in                                         buyer’s terms).


    Supermarkets have monopsony power allowing them to negotiate lower prices from farmers as they are the only source of business. Firms with monopsony powers are able to set the market price. It is assumed that monopsonists are profit maximisers, so they will look for the lowest prices – this can lead to lower prices for consumers as suppliers are paid less so firms can charge less. Another example of how firms use monopsony power is the NHS, they employ most doctors, so they can dictate hours and contracts.


    If there is a natural monopoly, it is inefficient as having duplicates of the same infrastructure as it doubles the costs and will only lead to higher prices for consumers due to firms wanting to cover their sunk costs faster.


    If trade unions are pushing for the higher prices than the market equilibrium, then the labour market will be more flexible. Higher wages can be demanded by limiting the supply of labour, by closing firms and striking. This could cause unemployment as employers cannot afford the higher wages. If trade unions push too hard, then there will be negative impacts


    In market failure, allocative and productive efficiency are not achieved. The increase in market power enables firms to reach selfish decisions creating abnormal profits, due to patents, economies of scale and non-price competition global businesses are created and have extensive market power. The monopoly power that the government has over public-

    sector goods could be inadequate or inefficient.


    Please enter your comment!
    Please enter your name here