Suppose two firms in a duopoly implicitly collude and charge a high price. How might each firm benefit from advertising that it will match the lowest price offered by its competitor?
A) The offer to match prices is a way of deterring entry by other large firms, thereby keeping the market share of the existing firms intact.
B) The advertisement ensures that the other firm does not cheat. If a firm cheats on the agreement and charges the lower price, the rival firm will retaliate by doing the same.
C) The offer to match prices is a way of signaling to antitrust authorities that the firms are not engaged in illegal collusion.
D) The advertisement is meant to suggest to consumers that the offered price is actually the lowest price available.
Answer: B
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