Explain the differences between the price leadership model and collusive oligopoly.

Question

What will be an ideal response?

Answer 1

The price leadership model is considered tacit collusion because it results from an
implied understanding that develops over time between a price leader and price
followers. The price leader unilaterally makes pricing moves that maximize its profits
alone. It uses public means (such as press releases) to communicate these moves to its
competitors. The latter may or may not choose to follow the price leader. Thus, following
is voluntary. By contrast, collusive oligopoly entails outright collusion between firms.
Their joint pricing strategies are forged collectively through formal meetings, formal
agreements, and binding contracts. If operating in violation of antitrust laws, the
colluders will necessarily keep these communications a secret. The price leadership
model offers some stability because the arrangement tends to tamp down competitive
warfare within an industry. Collusive oligopolies, such as cartels, are prone to cheating
and are relatively short-lived in comparison.