Chapter 12R, Problem 6MCQ

To determine

The correct option for reason where lower prices in oligopoly can result.

Answer to Problem 6MCQ

Option c is correct.

Explanation of Solution

Explanation for correct option:

c.

If there are low barriers to entry just like perfect competition prices charged for the products will be lower as competition will be more and it should be met to survive in the industry. Therefore, option c is correct.

Explanation for incorrect options:

a.

Formation of cartel leads to higher prices as it is an explicit agreement where firms decide their output level and tries to charge higher profit to seek higher profit and revenue. Therefore, option a is incorrect.

b.

Tacit collusion is another formation which is not explicit but motive is to earn higher profit only. Therefore, option b is also incorrect.

c.

Price leadership refers to the phenomenon where high prices set by the leader is followed by the other firms in the market in order to realize more revenues. Therefore, option c is incorrect.

d.

If products are differentiated then firm can charge higher prices instead of lower prices. Therefore, option d is incorrect.

Economics Concept Introduction

Oligopoly market structure: Market structure where there are few firms selling differentiated products. There are certain barriers to entry and exit which do not allow firms to enter the market easily.