Chapter 64, Problem 1CYU

a)

To determine

Whether it will increase or decrease the likelihood that a firm will collude with other firms in an oligopoly market structure to limit the output when the firm's initial market share is small.

Explanation of Solution

As the firm will produce a negative price effect by raising output and the price impact will, however, be seen more on the revenues of the company's competitors than on its own because of the little market share the company currently holds. Therefore, there will be less chance of the company having a low market share conspiring to collude with other firms in an oligopoly market structure to limit the output. The company will profit from a favorable quantity effect concurrently.

Economics Concept Introduction

Introduction: Competitors who collude covertly to coordinate their conduct by agreeing to share information but not explicitly exchanging it are said to be acting in collusion.

b)

To determine

Whether it will increase or decrease the likelihood that a firm will collude with other firms in an oligopoly market structure to limit the output when the firm has a cost advantage over its rivals

Explanation of Solution

The firm will lower the price by acting uncooperatively and increasing output. Since its competitors have higher expenses, they will lose money at the cheaper price while the company keeps making money. By raising its output, the company may be able to force its competitors out of business.

Therefore, there would be a decrease in the likelihood that the firm will collude with other firms in an oligopoly market structure to limit the output in this case.

Economics Concept Introduction

Introduction: Competitors who collude covertly to coordinate their conduct by agreeing to share information but not explicitly exchanging it are said to be acting in collusion.

c)

To determine

Whether it will increase or decrease the likelihood that a firm will collude with other firms in an oligopoly market structure to limit the output when the firm's customers face additional costs at the time they switch from one firm's product to another firm's product.

Explanation of Solution

There will be an increase in the likelihood that the firm will collude with other firms in an oligopoly market structure to limit the output because the firm would need to significantly reduce its pricing with a corresponding increase in quantity so that it can persuade consumers to switch to its product as it is expensive for consumers to transfer products. It is, therefore, likely that increasing output will not be economical due to the large negative pricing effect.

Economics Concept Introduction

Introduction: Competitors who collude covertly to coordinate their conduct by agreeing to share information but not explicitly exchanging it are said to be acting in collusion.

d)

To determine

Whether it will increase or decrease the likelihood that a firm will collude with other firms in an oligopoly market structure to limit the output when the firm and its rivals are currently operating at maximum production capacity, which cannot be changed in the short run

Explanation of Solution

This will make it more likely for the company to collude in this case.

Due to its present production capacity, it is unable to expand sales, rendering attempts to undercut rivals' pricing as per the Bertrand model futile due to the inability to create the output required to win over the competitors' customers.

As a result, the decision to help limit output is somewhat alluring in this case.

Economics Concept Introduction

Introduction: Competitors who collude covertly to coordinate their conduct by agreeing to share information but not explicitly exchanging it are said to be acting in collusion.