So what are collusive and non-collusive oligopoly? Collusion takes on many forms. Setting the price is perhaps the most common method, yet there are many other ways to lower the competitive forces which harm oligopolies’ profits. Most forms of collusion will in any case be convert ( aka secret) rather than overt (aka open). Yet some this type of competition-limiting behavior is illegal since most countries have strict regulations and rules against this type of collusion.
Convert collusion (aka tacit) is when no formalized agreement is set down and forms simply follow each others lead in pricing and output in offer to avoid confrontations. In this case there could be a price leader that the rest will follow, or firms could follow benchmark prices such as recommended prices set don (legally!) by a producer organization. If the main investors on the oligopoly instead have a formal agreement as to price and/or output, then collusion is overt. Collusion will then move the price towards a monopoly outcome and very little prices fluctuations as the price is more a result of agreement than market forces.
So let’s take a look at non-collusive oligopolies…non-collusive oligopoly is often characterized by brief spells of competitive flurries yet board price rigidity.
It is always easier for people to understand the difference between collusive and non-collusive through an example...The line of thinking illustrated in the example could be applied to the non-collusive oligopolies. So Jack and Jill are tired of carrying water up and down the hill and they decide to use their resources! Hence they decide to resort to the old-fashioned method of theft! They illegally steal water from the a nearby reservoir and instantly the "leakage" is noticed. The police arrest like how they are suppose to and charge them for grand-theft but, the police only have enough evidence to convict them of stealing a hose. Therefore the two are put into separate holding cells,all the while pleading their innocence to the crime of water-siphoning, but admitting to the crime of stealing hoses. The hose theft carries a two year jail sentence, and the interrogator knows that the prosecutor needs a confession to convict them of greater crime of water-siphoning. The two accused are unable to communicate. The crafty interrogator makes the following offer-separately-to Jack and Jill: "We have evidence enough to convict you for the theft of the hose and put you in each in jail for two years. Yet, we also know that you are also guilty of siphoning water. If i get confessions from both of you, we will give you each three years in a soft, minimum security prison. If one of you confesses meanwhile the other denies, the confessor will get one year but the denier will get 10 year peanalty!" Jack and Jill are left with this is think and ponder about...
1. Stick to the denial! Resulting two years of prison for both of them
2. Confess and get maximum of three years in prison while the other gets 10 years
As both Jack and Jill have two options each, there are four possible outcomes. Keep in mind, Jill's decision will affect Jack's outcome and vice verse. The two are interdependent! The payoff matrix on the right illustrates the nash equilibrium but the data are however not accurate!
The dilemma facing each of them is not knowing what the other will do! if Jill stick to her denial, she can hope to have a maximum of two years in prison- if Jack also denies. Jill's temptation to confess comes with the realization that Jack too is thinking the same way. Thus, if Jill denies she runs the risk that Jack confesses, which lands Jill in prison for 10 years. The question both are asking themselves is " I don't know what the other is going to to. Do i dare deny and out my hopes in the other also denying?" Overall, if Jack and Jill both deny the outcome of that will produce the optimum total outcome of two years watch, but the problem is that Jack and Jill are not allowed to talk. So, the best outcome is for one of them to confess and cheating on each other while the other dines. If both decide to minimize the impact of not knowing what the other will do, then both will confess. This leads to is what is a call a payoff matrix, an outcome known as the Nash equilibrium. Where each player has adopted a strategy giving him/her the best possible outcome given the action of the other.