Unit 3 – LearnEconomicsOnline

Firms have to be competitive in order to keep profits up and to remain in business. If they didn’t keep prices low then other firms could enter the market and undercut the incumbent firm, thus taking away its market share and supernormal profit. Alternatively rivals may do the same. These low prices benefit consumers and should result in more consumer surplus. Because prices are lower more of the good is demanded and hence the firm will produce more, this reduces allocative inefficiency as more resources are going towards the production of goods and services demanded by consumers (a definition of allocative efficiency). [...]

6 television firms were recently fined £1.2 Billion for colluding to fix prices of cathode rays in televisions. The result of this collusion was higher prices for consumers and thus larger profits for the television firms.

The article can be read here.

This shows the EU Competition Commission using its powers to prevent consumers losing out. It is also worth noting that the television firms undertook this price fixing by increasing the price of cathode rays, as oppose to the price of TVs themselves. Perhaps one reason behind this decision was because it is easier to monitor the price of cathode rays and hence this prevents cheating by any one member of the cartel. [...]

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Why is Competition Good?

Television Collusion