Cambridge International as and a level Economics Ebook

horizontal integration
may in fact 
be the cheapest way of getting growth in sales if the competing 
oligopolists are of a similar size. If a takeover or merger is 
likely to be resisted, a fi rm wanting to get rapid growth may 
prefer to look for more profi ts by producing in diff erent 
countries and eventually become a multinational corporation.
Th
e diffi
culty of choosing competitive strategies and of 
predicting the response of rivals may change the objectives 
of the fi rm. Profi t-maximising strategies may be replaced 
by ‘satisfi cing’ (see below). Th
e fi rm’s management 
becomes more cautious, preferring to make just enough 
profi t to keep the shareholders happy. Th
e focus shift s 
towards maintaining market share.
Cooperation and collusion between 
oligopolists
Th
ere are situations where big fi rms fi nd that it is in 
their interest to cooperate with rivals. One of the best 
examples is where research and development costs are a 
high proportion of the total costs and where the pace of 
technological change is very rapid. It is in the interests 
of all the fi rms to pool their knowledge and agree on 
technical standards, perhaps taking part in joint ventures.
Collusion is altogether diff erent. It is an anti-competitive 
action by producers. Informal or tacit collusion, however, is 
not illegal and usually takes the form of 
price leadership
, 
where fi rms automatically follow the lead of one of the 
group. Th
e objective is to maximise the profi ts of the whole 
group by acting as a single monopolist. Th
e price leader is 
invariably the dominant fi rm and has suffi
cient market power 
to determine a price change that other fi rms follow. On the 
other hand, a 
cartel
is a formal price or output agreement 
between fi rms in an industry to restrict competition. Th
is is 
illegal. 
Figure 7.19
below shows what happens when fi rms join 
a cartel and agree prices. By doing this, they are operating as 
a monopoly and maximising their profi ts.