ACCA Applied Knowledge · Business and Technology · Microeconomic factors
Two rival firms in an oligopolistic market secretly agree to fix prices at a high level and share the market. Which of the following best describes the likely outcome and its status?
The firms have formed a cartel. Secret price fixing and market sharing restrict competition, usually raise prices for consumers, and are generally unlawful under competition law, unlike a natural monopoly which arises from cost structure.
- AConsumers benefit from lower prices and the agreement is encouraged by competition authorities
- BThe firms form a cartel, which usually raises prices and is typically illegal under competition lawCorrect
- CThe firms create a natural monopoly, which is accepted where costs are very high
Explanation
Collusion to fix prices and share markets is a cartel. It restricts competition, tends to raise prices and reduce choice, and is generally prohibited by competition law. A natural monopoly arises from cost structures, not agreements between rivals.
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