ChainWhat it assumes · how to break it
Start
The CMA fines firms caught running a cartel, by up to 10% of their worldwide turnover, and blocks mergers that would substantially lessen competition.
1
As a result, the expected cost of colluding rises, as firms weigh the chance of detection against fines that can be far larger than the extra profit.
deterrence · fines
deterrence · fines
Best link to attack
Assumes: Firms believe they are likely to be caught.
Assumes: Firms believe they are likely to be caught.
But: Secret cartels are hard to detect, and tacit collusion without any agreement may not break the law at all, so the deterrent is weak.
2
This means fewer firms join cartels and existing ones break up, partly because leniency rewards the first member to confess.
leniency · cartel instability
leniency · cartel instability
Assumes: Cartel members fear that another member will confess first.
But: Where members trust each other and meet often, the leniency incentive may not be enough to break the cartel.
3
At the same time, blocking mergers between close rivals keeps the number of competing firms higher, so market concentration does not rise.
concentration ratio · merger control
concentration ratio · merger control
Assumes: The blocked merger would have raised prices.
But: Blocking a merger can prevent cost savings that would have allowed lower prices.
4
Therefore, firms keep competing on price, so prices stay closer to the competitive level and do not rise towards the monopoly price.
price competition
price competition
Assumes: The remaining firms compete actively on price.
But: In a mature oligopoly, prices may stay rigid, as the kinked demand curve shows, even without collusion.
End
Prices stay lower and closer to the competitive level than they would with cartels and mergers.
Evaluation chain
- E1However, the effect on prices depends on whether the CMA can detect and prove collusion.
- E2Because tacit collusion, such as following a price leader, involves no agreement, it is hard to prove and may not break competition law.
- E3As a result, oligopolists can keep prices high and stable by watching each other, with no risk of a fine.
- E4So fines bring prices down where explicit cartels are uncovered, but have little effect in concentrated markets where firms coordinate tacitly.
Can you say this chain from memory?
Members can hide the links, test themselves and track which chains they have mastered.
Practise this chainMembers can hide the links, test themselves and track which chains they have mastered.
Questions this answers
- Assess the effectiveness of competition policy in keeping prices low.
- Explain how fines for collusion can deter price fixing.
- Discuss whether competition authorities should do more to control oligopolies.
Diagram
Kinked demand curve to show that oligopoly prices can stay rigid without explicit collusion; compare with a cartel diagram where joint MC = MR gives a monopoly-level price that fines aim to prevent.
Reverse and related
Weaker competition policy → collusion and mergers become more attractive, so prices drift towards the monopoly level.