Chapter 12R, Problem 13MCQ

To determine

The correct option that favors the tacit collusion in an oligopolistic competition.

Answer to Problem 13MCQ

Option b is correct.

Explanation of Solution

Explanation for correct option:

b.

In oligopolistic market, tacit collusion takes place between the firms without being information shared. In this, firms take collective decisions to influence the prices and the output level. Restricting output level in order to charge higher price is one of the example of tacit collusion. Therefore, option b is correct.

Explanation for incorrect options:

a.

Tacit collusion is likely to be impossible if larger firms are involved as they have to charge lower prices for their products. Therefore, option a is incorrect.

c.

Usually oligopolistic firms involve lower quantity as compared to other market structure such as monopolistic and perfect competition which makes it difficult to keep track of output and input. Therefore, option c is also incorrect.

d.

In oligopolistic market, there are only few firms selling their products. Prices can be high as they sell differentiated products. Therefore, option d is incorrect.

e.

Tacit collusion is a firm’s strategy where firms are not directly collude to make such actions. It is not an explicit collusion which is considered as illegal in US. Therefore, option e 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.