Question:- Price leadership in an oligopoly entails a type of:
a) Price competition b) Implicit collusion c) Outright collusion d) Formal cartel
Answer: b) Implicit collusion
The practice of price-leadership in oligopoly amounts to its hidden and common concerted action among competitors. Oligopoly is the market form characterized by small number of powerful companies whose behavior is strongly connected (sometimes dependent) due to large market share they share (approx. 40-50% on average). The price leadership works when the firm on the lead (price leader) set the price parameter, and the others (the price followers) either set a similar price or they slightly adjust in each of their prices according to the price leadership . Such winks-and-nod arrangements enable a firm to enjoy high prices and earnings through a tacit agreement or a formal cartel, both of which are illegal cartels.
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