A Level Economics AQA Practice Exam

What is a collusive oligopoly?

1. A market with many small firms competing

2. A situation where firms compete fiercely

3. A few firms acting together to fix prices or output

4. A monopoly dictating all market prices

The correct answer is: A few firms acting together to fix prices or output

A collusive oligopoly is characterized by a market structure where a small number of firms dominate the industry and decide to collaborate or coordinate their actions, particularly regarding pricing or production levels. This collusion typically aims to maximize collective profits by regulating competition among themselves, which can lead to higher prices for consumers than would be the case in a competitive market. In this scenario, firms may engage in agreements or informal understandings to establish price floors, limit output, or divide markets, effectively reducing the uncertainty stemming from competition. Such behavior diminishes the competitive pressure, allowing these firms to behave more like a monopoly. This is why the understanding that a few firms act together to influence market outcomes is central to the definition of a collusive oligopoly. This understanding contrasts with the nature of a competitive market featuring many small firms, which is depicted in the first choice, or a situation of fierce competition where firms are solely focused on gaining market share without colluding, as described in the second choice. The fourth option describes a monopoly, which is fundamentally different as it involves a single firm controlling the market rather than a few firms cooperating.