Why do some firms in an oligopoly refrain from colluding?
What will be an ideal response?
There are two main reasons why firms may refrain from colluding. First, the nature of competition predicts that although the firms may have a verbal agreement that they will both set high prices, they may still engage in secret price cutting to capture more of the profits for themselves. Thus, although collusion is a great deal for oligopolists, it is difficult to sustain. Second, price fixing is illegal. The potential punishment for engaging in such actions has a strong discouraging effect.
You might also like to view...
Which of the following is true?
a. The Great Depression re-enforces the view that raising taxes in the midst of a severe recession is a bad idea. b. The Great Depression clearly indicates that a prolonged period of monetary contraction will keep inflation low and promote monetary stability. c. The Great Depression illustrates that trade restrictions will protect domestic industry and save jobs. d. The Great Depression demonstrates that the political incentive structure during a severe downturn will encourage politicians to avoid frequent policy changes.
The aggregate demand curve indicates the relationship between
a. the real wage rate and the quality of resources demanded by producers of goods and services. b. the interest rate and the amount of loanable funds demanded by borrowers. c. the natural rate of unemployment and the demand for goods and services when the economy is in long-run equilibrium. d. the general price level and the aggregate quantity of goods and services demanded.