Chapter 12R, Problem 14MCQ

To determine

The correct option that define the way in which oligopolistic firm attempts to legally collude.

Answer to Problem 14MCQ

Option b is correct.

Explanation of Solution

Explanation for correct option:

b.

In oligopolistic market, firms use price leadership to signal their competitors to increase the price by restricting the output level. Collusion refers to the formation of oligopolistic firms where they restrict the level of output in order to increase the prices. For instance, oil prices are increased worldwide. Therefore, option b is correct.

Explanation for incorrect options:

a.

By engaging in non-price competition firms do not signal the other firms to do so. Non-price competition can be done through advertising and publicity increase their brand loyalty. Therefore, option a is incorrect.

c.

Usually oligopolistic firms take actions to charge higher prices in order to seek higher profit. Collusion is a collective activity rather than non-cooperative activity. Therefore, option c is also incorrect.

d.

In oligopolistic market, products are differentiated as few firms are selling such products with rare substitutability. By differentiating their existing products, firms do not intend to collude. Therefore, option d is incorrect.

e.

Advertising is one of the type of non-price competition activity which is done by the firm in order to increase brand recognition and brand loyalty. 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.