Evaluate the view that governments should maintain strong policies

to control collusive behaviour by oligopolies

An oligopoly is a market structure in which a small number of firms own the industry. Collusive
behaviour is when oligopoly firms incidentally or directly form together and create a higher,
unchanging price, effectively becoming a monopoly. A monopoly is a market structure where a
firm owns an industry, and has complete control of supply and price.

This diagram represents what an oligopoly looks like when firms in an oligopoly formally collude,
which is effectively a monopoly. You can see from CPab that the firm is making abnormal
profits(effectively this is the diagram for all the firms colluding), and this is because the firms
colluding have the power to set price wherever they want, and not worry about any financial
losses they could receive compared to if they were non-collusive.

For example, if Coles and Woolworths were collusive oligopolies, then they could, for example,
set the price of bread at an abnormally high price, as since Woolworths and Coles collectively
own a large part of the supermarket industry, the demand for bread would be relatively inelastic,
compared to if they were non-collusive, and only Coles raised the price for bread. This is
economically unhealthy, as it provides the colluding firms an unfair advantage over other firms
that are non-collusive, while also taking advantage of consumers. With this in mind,
governments should maintain strong policies to control collusive behaviour, because the
government, in essence, is the public, and its role is to protect consumers from these sorts of
behaviours.
On the other hand, putting too much emphasis on government regulations and checkups on
firms is time consuming and expensive, and it could be money put into other beneficial sectors
in society, for example education or public infrastructure. On top of hindering the government,
constant audits and checkups can be detrimental to firms especially if most of them aren’t
engaging in any illegal practices and are getting caught up in the government’s crosshairs for no
reason.

Overall, governments should maintain strong policies to control collusive behaviour, as the
malpractice of collusion between firms takes advantage of consumers within the economy.
Furthermore, the government is ultimately funded up of ‘the people’, and should be keeping the
public’s interest as the top priority, so in a way it is the responsibility of governments to protect
consumers from being manipulated by collusive oligopolies.