Introduction

The previous chapters were about the application of competition law to firms that dominate a market individually. We now turn to examine how competition law controls markets populated by a small number of firms. Economists are divided over the level of regulation required in oligopoly markets because while high degrees of concentration might make markets less competitive, it is also possible to find lively competition in an oligopoly market.

A simple example can illustrate the principal competition concerns in oligopoly markets. Suppose we have a market with three large producers of a chemical in the EC. The product is standardised and competition is purely based on price, the three are protected from imports by anti-dumping duties and face constant but unchanging levels of demand, there are no other significant competitors in the EC and no technological developments are possible to reduce production costs. In this kind of market, the temptation for the three firms to come to an agreement to fix prices or subdivide markets is high. If they agree to fix prices they can behave like monopolists and earn more profit than if they competed. What is particularly worrying from the perspective of competition law enforcement is that the firms need not even communicate with each other to fix prices – one of the firms might ‘lead’ a price increase, for example it might raise its prices by €10.