Why is collusion evidence of market power in oligopolies?

Collusion is evidence of market power in oligopolies as it allows firms to control prices and output, limiting competition.

In an oligopoly, a small number of firms dominate the market. These firms are interdependent, meaning the actions of one firm directly affect the others. If these firms collude, they can effectively act as a monopoly, setting prices and output levels to maximise their joint profits. This is a clear demonstration of market power, as they are able to manipulate the market to their advantage.

Collusion can take various forms, such as explicit collusion where firms openly agree on prices and output, or tacit collusion where firms indirectly coordinate their actions. Regardless of the form, collusion allows oligopolistic firms to reduce uncertainty, avoid price wars and increase their profits. This is not possible in other market structures like perfect competition or monopolistic competition, where firms are price takers and have no control over the market conditions.

However, it's important to note that collusion is generally illegal in many jurisdictions as it is considered anti-competitive. It leads to higher prices and lower output, which is detrimental to consumers. It also stifles innovation and efficiency, as firms have less incentive to improve their products or reduce their costs when they can simply increase prices.

In addition, collusion is often unstable. Each firm has an incentive to cheat on the agreement by secretly lowering their price to increase their market share. If one firm cheats, the others are likely to follow, leading to a breakdown of the collusion agreement. This is known as the prisoner's dilemma.

In conclusion, collusion is a clear demonstration of market power in oligopolies. It allows firms to control prices and output, limit competition, and increase their profits. However, it is generally illegal and often unstable, leading to negative consequences for consumers and the economy as a whole.