Cambridge International as and a level Economics Ebook

Figure 7.25 
The kinked demand curve
P
1
P
0
Price/Cost
Quantity
Q
MC
A
D
E
MR
MR
F
Table 7.6 
An oligopoly game matrix
£2m each
£1m B
£2.2m A
£2.2m B
£1m A
£1.5m each
£1
90p
A’s Price
£1
90p
B’s 
Price
The cells show 
each firm’s 
expected 
profits
183
Chapter 7: The price system and the microeconomy 

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Such an agreement, however, is illegal since it is 
not in the best interests of consumers. Tacit collusion, 
however, is not illegal. It involves an unwritten 
agreement between two fi rms to not compete with each 
other through a price war. A typical example might be 
where two large bus companies in a town agree not to 
cut fares in order to compete. Th
ere may also be a tacit 
agreement to not develop new routes that duplicate each 
other’s services since each company’s costs would rise 
and profi ts reduce accordingly.
Th
e behaviour of oligopolists continues to give 
concern to regulatory bodies such as the UK’s 
Competition and Markets Authority. A particular cause 
for concern is the anti-competitive behaviour of fi rms 
which collude. Th
is is illegal but very diffi
cult to prove. 
It is, though, indicative of mutual interdependence 
as in the earlier analysis of cartels. Collusion in some 
markets is likely to be tacit whereby rival fi rms have an 
unwritten agreement not to compete directly with each 
other or to engage in a price cutting campaign. Here, the 
oligopolists would seem to be satisfi ed with the profi t 
levels they are achieving.
Pricing policy
Aspects of pricing policy were referred to earlier in our 
discussion of oligopoly and monopoly. In this section, 
price discrimination, limit pricing and price leadership 
will be considered. Each of these are examples of where 
fi rms charge prices that are not what might be expected in 
the conventional theory of the fi rm.