Collusion and Game Theory (Short Answers)

Here is a short video covering two short questions. What is collusion? Using game theory, explain the potential benefits from collusion between firms.

What is collusion?

• Collusion is any explicit or tacit agreement between suppliers in a market to avoid competition either by price fixing or market sharing.
• The main aim is to achieve a level of joint profits similar to that which might be achieved by a pure monopolist.

Using game theory, explain the potential benefits from collusion between firms

• In the game theory example shown in the table, there is an incentive for both firms to collude by charging a high price.
• This gives joint profits of $8m.
• If they competed at a low price, total profit would fall to $2m