Consider two firms that sell substitute products and compete with one another in
ID: 1103517 • Letter: C
Question
Consider two firms that sell substitute products and compete with one another invarious markets across the country. As a casual observer of the market, you do not know the demand function for each of these products nor the firms’ cost functions. You read a newspaper article that claims these two firms are colluding for the following reasons:
(a) The firms’ price changes match each other quite closely over time
(b) When it is known or likely that their costs have risen, both firms raise their prices
(c) When a rival firm selling a substitute product entered the market, both of the original firms lowered their prices 1
(d) There are markets where only one of the firms is operating, indicating that the firms have divided the country into local monopolies among themselves
For each of the reasons, explain whether you agree or disagree with the newspaper article’s author and reference the predictions of the oligopoly models we have examined whenever relevant.
Explanation / Answer
Oligopoly is such a market structure where there are few firms completing with each other. There is a strong rivalry between each other.
a. It is possible because price is sticky in the short run but this behaviour of price stickiness doesn't affect market in the long run and hence they can possible match each other.
B. The price in the oligopoly market is set in such a way that first the cost is calculated at full capacity level and then the add a conventional market up to determine price. Hence in the short sun such fluctuations has no effect but in long run price can be alternative.
C. Price is the last thing and oligopoly will deal.with as they have sticky price situation. So for preventing entry or creating barriers to entry the either prefers brand proliferation or but cost set up or by an application .
d. Oligopoly can only sustained if there is few sellers else it won't. So only possibility is that if 2 firms are operating at 2 different and far away location then only they can act monopolies of that region.