Part - I

Introduction

'It's a world of competition!' Yes that's what is said when it comes to profitability. Profitability in financial terms is represented by the amount the firms make for themselves after meeting their costs. With the passage of time, the number of factors that affect profitability has increased drastically. And most of the time, such factors cannot be quantified, leading to a more complex scenario. When faced with situations so complex, firms are bound to think whether they would compete or collude to make the best out of the factors.

The dictionary meaning of the term 'collusion' is 'a secret agreement between two or more parties for a fraudulent, illegal, or deceitful purpose.' Whether firms collude or compete will depend on many factors that can be difficult to measure and put into a theory. These may be the number of sellers, their personalities, whether they have equal or unequal shares of the market, whether their costs are the same, the ease of cheating and of detecting cheating, and whether the sellers can compete on non-price bases such as service and quality. However, a logical discussion might lead to a road map as to what makes the firms go for collusion, what prevents them, whether it is more profitable to collude and what steps the firms might adopt to keep themselves safe from the mal effects of collusion.

This piece of work starts with a basic literature review as to what leads to the existence of competition or collusion. The review is then extended to a case study on the private ground water extraction market in West Bengal. The results of the case study is then analysed and issues that can be hindrances to a collusive system, namely price rigidity, is discussed. Information asymmetry has been identified as the key to the breakdown of a collusive system. The paper concludes with the need of colluding firms to maintain transparency in their courses of actions - whether it be restrictions on sales or fixing of prices or changes in demand conditions.

Sunk Costs Make the Difference

From time immemorial, firms have taken up and implemented strategies for economic profits. An important point concerning economic efficiency is that firms will restrict output relative to that of the industry if they find that the amount they produce will have a significant effect on the price they can charge. This might lead to a loss in efficiency in terms of output. Economists use the term "market power" to describe the ability of any firm to set price.

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* Contributed by: -
Riddhi Dutta,
MBA Finance, Leeds University Business School, UK,
Sourav Dey,
MA Economics, Jadavpur University, Kolkata, India.