Unfair Market Competition in Oligopoly Markets: Impacts on Welfare and Characteristics of Petrol Market

Running Head: Unfair Market Competition
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ATMC BUS502 Principles of Economics for Accountants – Semester One 2018
Assessment task 2 – Responses to articles - Article 3
Oligopoly Markets’ Competition
Date: 3rd June

Unfair Market Competition 2
Oligopoly Markets’ Competition
Part 1: Price Setting and Collusion
By price setting it means that the players in this market are not in a competitive market
because they have power over the price of the products they sell (Chand, 2018). They can either
lower of raise their prices depending on the strategy they find to be most profitable. However,
despite the ability of oligopoly market players to have power over their prices, there still exist
some certain level of competition in this market. The competition is always by the already
established players. Each player’s individual goal is to sell as many units as possible so as to
maximize revenues. However, this is not possible as each player has its own share of the petrol
market. In order to sell more units which means that the player sells increasing units over the
others, the player is forced to offer the units at a lower price to attract more customers. Attracting
more customers means stealing some customers from the other players. Since the other players
cannot accept to lose their customers, they are also forced to cut down their prices to the same
price offered by the player who led in the price cut.
However, the players need to maximize revenue by selling at a higher price. If any of the
players in the market decides to employ the price raise strategy to maximize individual profit, the
actual result is a decline on the player’s revenue. This is because players in the oligopoly markets
are most likely not to follow a price raise strategy. Thus, the initial customers for the price
raising player are forced to shift their petrol demand to other players in the market whose price
levels are lower. The market share of the price raising firm is greatly reduced. This type of
competition is good for the consumers as it makes the price of products cheaper given that firms
might always accept a price cut but not a price raise. Furthermore, given the price constraint, the
players are forced to sell more units at the current price to maximize revenues. This is not always
the case, the players may at some point find it difficult to sell at the lower price and decide to
raise the price together. This is greatly discourage by the competition commission as it gives the
players some great monopoly powers.
The joining together of players to act at a common benefit is what is referred to as to
collusion (Riley, 2018). These players agree to raise of the petrol price whenever the price leader
raise its own. In this case BP is the price leader. Similarly, when the price leader cuts the price so
as to discourage entry, the other players follow. Most of the times collusion causes an increase in
the petrol prices. Other than collusion, another market conduct that would create unfair market