Why does it often make sense to use the dominant firm model when analyzing carte
ID: 1116824 • Letter: W
Question
Why does it often make sense to use the dominant firm model when analyzing cartel pricing? O A. Cartels usually have one very large producer along with a number of smaller producers. The large producer is therefore like a dominant firm, and the smaller cartel members are like fringe firms O B. In most cartels, one producer dominates decisions about price and quantity while other producers accept the dominant firm's decisions ( C. A cartel usually accounts for only a portion of total production and must take into account the amount supplied by noncartel producers. The cartel is therefore like a dominant firm, and the noncartel producers are like fringe firms. None of the above. 0 D.Explanation / Answer
C
The dominant firm model is the model that in some oligopolistic markets, one large firm has a major share of total sales, and a group of smaller firms supplies
the remainder of the market. The large firm has power to set a price that maximizes its own profits. This happens in case of a Cartel where some oligopolistic firms decide to collude to maintain high prices and avoid competition. The Cartel itself thus is the large firm.