Define collusion, including a brief explanation of the different types of collusion, and explain why firms in an oligopolistic market would want to collude.

Firstly, we need to look closely at the exam question and highlight each of the areas of knowledge we need to cover:Define collusionExplain types of collusionDefine oligopolistic market (oligopoly) and offer a real-life example4 or 5 reasons why collusion would be attractiveCollusion is a form of anti-competitive behaviour in which a group of businesses choose to collude on prices or output quantities (market sharing).Two types:Explicit collusion - formal agreement to price fix or market shareTacit collusion - unspoken agreement to collude based on mutual understanding Oligopoly- A concentrated market that is dominated by a small number of large firms. There are typically very high barriers to entry and the dominant firms have very strong brand recognition. Most notably, the competition between this cluster of powerful firms is intense and hence, each firms’ actions are interdependent, and firms must anticipate likely rival relations in order to remain competitive.Example: UK energy suppliers 'The Big Six' - Assuming products are homogeneous, British Gas could theoretically undercut all their rivals and win all UK energy consumers, hence one can see why a collusion keeping prices fixed between energy suppliers would be attractive.The reasons why collusion is attractive for firms:Principally, firms in a cartel are seeking to maximise joint profits above their profit level if each firm were to act independently.Collusion also reduces the cost of competition - undercutting rivals within an oligopolistic market is likely to lead to a price war in which firms keep lowering prices until price is equal to the marginal cost of making the product and hence, all profits suffer.Collusion that results in higher profits also increases producer surplus and shareholder valueColluding can also reduce innovation costs of information about ongoing projects is sharedCollusion reduces uncertainty for a firm that is a defining feature of an oligopoly