Economics Essay Example | Topics and Well Written Essays - 500 words - 18

Economics - Essay Example competitor lowers its price it may attract some - but not all - buyers because product differentiation makes it possible for some to remain with the sellers product despite the price increase, and they will not switch. Rivalries among oligopolists can be circumvented by some form of open or tacit collusion among members, in the process converting the oligopoly, at least temporarily, into a sort of monopoly. One example is price leadership, where one company, usually the biggest among them, sets the price and the others follow. It is somewhat risky because unless the others expect to benefit or are not harmed by the move, they can undercut the price instead, and a price war among the participants can ensue. A company may also behave in such a way that it does not make things difficult for its competitors. Companies may set their prices so that they are only a few cents apart and thus somehow avoid accusations of having colluded in setting prices. Open collusion (a cartel) is possible but is illegal in the United States. A successful cartel can charge a monopoly price at the expense of the consumers and obtain monopoly profits. An exception in the United States applies to regulated industries such as telecommunications and gas pipeline transportation where members are allowed to behave as cartels provided they do not undercut the prices set by government regulatory agencies (Baumol and Blinder, 1997). A monopoly is either a pure monopoly or a natural monopoly. A pure monopoly is one where there is only one supplier of a product that has no close substitutes and where it is impossible or extremely difficult for another firm to coexist. A natural monopoly, on the other hand. is an industry in which advantages in large scale production make it possible for a single firm to produce the entire output of the market at a lower than average cost than a number of firms each producing a smaller quantity. It is the latter kind of monopoly that can evolve from a