Page 208 - DECO101_MICRO_ECONOMICS_ENGLISH

Unit 13: Oligopoly

The situation deteriorated further in 2007, as more airlines were inspected and charged Notes
for various anti-competitive practices. European Commission charged several airlines for
fi xing freight service prices. British Airways had to pay billions of dollars in fi nes as the
UK and the US competition authorities denounced it for price fixing during the period

2006-07.
Difficult to Detect

Cartelisation is very diffi cult to detect and investigate for its inherently secretive nature.

The task is more difficult in aviation industry because it operates across borders. As a
consequence of liberalisation, many large airlines such as British Airways and Lufthansa
are now privately owned. These are being increasingly scrutinised as they engage
themselves in collusive agreements.

In all the reported cartel cases, there was always one partner who spilled the beans with
the hope of getting away with lesser penalty or what is called as leniency. In the case of
British Airways, which was prosecuted in 2007, it was Virgin Airlines which cooperated
with the authorities.
Even in the Korean case, it was the Korean Airlines which applied for leniency by
becoming the prosecuting agency’s ‘friend’. Such a provision for leniency now exists in all
competition laws, including the one in India. In fact, leniency can be sought by more than
one perpetrator as the enquiry moves on thus buttressing the prosecution’s case.
The Australian Competition & Consumer Commission has to date named 15 airlines in
its investigation and has already collected $38 million as fines while some of the cases are

yet to be decided.
The damage that airline cargo cartels cause by raising the surcharge rates is huge as
evident from the fi gures published by competition agencies. Consequently, the prices of
goods transported also get overburdened from artificial hikes thus affecting consumer

welfare adversely.
Source: www.thehindubusinessline.com
Price Leadership

This is an example of imperfect collusion among duopoly firms. It may result through tacit

or formal agreement as one firm sets the price and others follow it. Price leadership has two
forms.
Price Leadership by a Low Cost Firm

Say, two firms A and B face identical demand curves (i.e., AR) and MR. If firm A has lower MC

and AC curves then MC < MC and AC < AC , as shown in Figure 13.3, fi rm A will maximise
2
2
1
1

its profit by equating MR to MC at point E and selling Q units at price P . Firm B will maximise
1
1
1
1

its profits by equating MR to MC at point E and selling Q units at price P . But firm B will not

2 2 2 2
be able to charge P price as fi rm A is charging P which is lower than P . The high cost fi rm will
2
2
1
then accept the leadership of the low cost fi rm and sell Q units at price P . The high cost fi rm
2
1
shall earn less profit than low cost fi rm.

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