Reducing Rivals Prices: Government-Supported Mavericks as New Solutions for Oligopoly Pricing

Abstract

One of the most important market imperfections in modern capitalism and surprisingly one of the most under-regulated is oligopoly pricing (conscious parallelism). Only few suggestions have been made over the years to regulate oligopoly pricing. All suggestions pose serious obstacles to their efficient application. Accordingly, oligopoly pricing is not regulated. It is left to the workings of the market (or pure luck), while acknowledging the marketis limited regulatory force. This article proposes a novel method for regulating oligopoly pricing by way of introducing a government-supported maverick into an oligopolistic industry for a limited time. The maverick will price its products at competitive or near-competitive levels, based on considerations of consumer or total welfare. His rivals will follow his pricing strategy, or incur significant losses and possibly exit the market. As will be shown, the proposal may significantly reduce allocative inefficiency by reducing the welfare losses from supra-competitive pricing. The threat of intervention might be sufficient, in itself, to reduce the problem of oligopoly pricing. It may also reduce productive inefficiency by combating the problem of inefficient plant and firm sizes. This article analyzes the market conditions that must exist for this proposal to be operational and points to its benefits as well as its costs and limitations.