te industry with three firms (Rugby, Blue Circle and United). An example of covert collusion would be the cement industry, which was found guilty of rigging contracts and was fined eight million pounds.Tacit collusion is forming implicit contracts as if they are colluding; for example the soap powders industry. In this type of market rather than competing using prices, non-price competition occurs. Examples of non-price competition are special offers, advertising and quality of service, all of which are to establish their own brand loyalty and maintain a high concentration ratio of the market.Figure 1. shows an oligopolistic firm operating in such a way where it produces where marginal cost is equal to marginal revenue so as to profit maximise. The equilibrium is at price P* and quantity Q*. It produces at this quantity because of the firm were to increase its output by an extra unit, marginal cost would exceed marginal revenue and therefore the firm would make a loss. If the firm were to decrease the quantity produced then the firm would still be able to produce more until point D where the firm can no longer make any more profit. Therefore the oligopoly's supernormal profits would be ABCD which in a cartel would be shared equally.The firms work out the market price by a process called "cost plus pricing". Firms will take the average cost of production, plus a profit mark up of a certain percentage and this will be the price. So, if demand increases quantity does not change much, so prices remain quite stable. Oligopolies will compete to increase demand by advertising and market shares.Fig 1.The main theories of oligopolistic competition are prisoner's dilemma(Axel Rod) and game theory, which involve a compromise between the firms to charge one price for all their products throughout the industry, so as to share all profits. Therefore supernormal profits will exist in an oligopoly if the collusion between the firms is sustainable. This...
