Compare and contrast the market structures of monopolistic competition with an oligopoly in detail - NSC Economics - Question 5 - 2023 - Paper 2

Collusion can lead to significant negative effects on the economy:

1. Reduced Consumer Welfare: Collusive agreements can result in firms setting higher prices than in a competitive market. Consumers pay artificially high prices, leading to reduced consumer surplus and overall welfare.

2. Inefficient Resource Allocation: Firms involved in collusion often refrain from investing in new technologies or innovations, leading to decreased economic efficiency. Resources are not allocated to their most productive uses, which would have occurred in a competitive environment.

3. Market Power Abuse: By cooperating rather than competing, firms can exert significant market power, leading to monopolistic practices that further disadvantage consumers.

4. Barriers to Entry: Collusion can strengthen barriers to entry for new firms, as established firms may engage in predatory practices against newcomers, making the market less competitive in the long run.

In conclusion, collusion not only harms consumers through higher prices but also stifles innovation and efficiency in the economy.