One of the major factors behind the collusive behaviour of firms in an oligopolistic market structure, according to the case study on the car industry in the UK, is price leadership. In July 1999, for instance, Volvo admitted to entering secret agreements to keep British car prices high, with available evidence demonstrating that firms in the car industry have been inflating car prices using selective and exclusive distribution (Sloman para. 2).
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This system removes any form of competitive behaviour as car manufacturers only supply the finished products through ‘official’ dealers, who then sell the products as listed by the manufacturers or at small pre-arranged/premeditated discounts.
In the literature, price leadership is explained as a scenario whereby a dominant firm establishes the prices of products and also controls price shifts for other firms in the sector to adopt and follow (Gisser 1035).
In the case study, it is clear that Volvo and other car manufacturers in Britain have adopted price leadership to facilitate tacit collusion at the expense of consumers, owing to the fact that they have demonstrated a predisposition to set the car prices high enough that the least cost-efficient car dealership in the industry will definitely earn some return above the competitive level (Felli & Villas-Boas 254).
The second factor behind the collusion behaviour of firms in the UK’s car industry is anticompetitive pricing practices. These practices “include threatening mainland European car dealers with losing their dealership if they sell to British buyers, and delaying the delivery date of right-hand drive models to mainland European dealers in the hope that British buyers change their mind and go back to a British dealership” (Sloman para. 4).
In the literature, anticompetitive pricing practices in an oligopolistic market structure have been largely associated with lack of market efficiencies and innovative capacities, inadequate incentives for product differentiation, insufficient consumer protections, lack of improvements in the quality of products and services provided, inadequate customer welfare responses by failing to provide consumers with a broader choice at increasingly competitive prices, and other adverse outcomes for consumers including high switching costs and trade-offs between price and quality (Avlonitis & Indounas 343-345).
The third factor behind the collusion behaviour of manufacturers in the UK’s car industry is restrictiveness. For instance, it is demonstrated in the case study that before regulations were changed to deal with this oligopolistic challenge, car distributors were not allowed to set up dealerships in different countries and to sell multiple brands of cars within their showrooms, not mentioning that distributors who were offered exclusive ‘sales territory’ distribution agreement by car manufacturers were restricted from reselling cars to other agencies who were not part of the manufacturer’s network (Sloman para. 5).
It has been well documented in the literature that most firms with an oligopolistic market structure thrives by restricting their products and services not only to create an artificial demand, but also to minimise competitive responses. In effect, it is the customer who suffers from such an arrangement by paying high prices for goods and services.
Lastly, another factor which is closely related to restrictiveness concerns the limiting of sources of supply to maintain high prices for products and services (Sloman para. 6).
From the case study, it is evident that car prices in the UK have been high due to the manufacturers’ uncompetitive behaviour of limiting the sources of supply not only to achieve joint-profit maximisation among manufacturers and dealers in the car industry, but also to prevent possible price and revenue streams instability within the industry (Avlonitis & Indounas 355-356).
Avlonitis, George F., and Kostis A. Indounas. “The Impact of Market Structure on Pricing Objectives of Service Firms.” Journal of Product & Brand Management. 13.5 (2004): 343-358. Emerald. Web.
Felli, Leonardo and J. Miguel Villas-Boas. “Renegotiation and Collusion in Organizations.” Journal of Economic & Management Strategy. 9.4 (2010): 453-483. Academic Search Premier. Web.
Gisser, Micha. “Price Leadership and Dynamic Aspects of Oligopoly in U.S. Manufacturing.” Journal of Political Economy. 92.6 (1984): 1035-1048. Academic Search Premier. Web.
Sloman, John. Rip-Off Britain: Evidence of Oligopolistic Collusion? Pearson. 2006. Web.