Chapter 66, Problem 2FRQ

a)

To determine

Whether oligopolists will behave noncooperatively or engages in tacit collusion when it is difficult for a firm to detect whether another firm has raised output.

Explanation of Solution

No, in this case, there would be no possibility of tacit collusion of firms because each firm is making output individually. And, each firm uses its resources according to the requirement of its production which depends on its capacity to produce. Therefore, there would be no existence of uncooperativeness and no collusion between firms.

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 oligopolists will behave noncooperatively or engages in tacit collusion when firms in the industry coexist at the time of fixing prices for a long time.

Explanation of Solution

Yes, there is a possibility of tacit collusion because when firms decide about price in the industry by coexisting then they need high coordination and cooperation. But it is possible that there would be no cooperation among firms while they maintain high prices in the long run because they can disagree with the decision.

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 oligopolists will behave noncooperatively or engages in tacit collusion when each oligopolist firm assumes that new firms can enter the market in the future.

Explanation of Solution

No, there is no possibility of tacit collusion in this case because business firms in the sector can make assumptions of entry and exist as there is no need for cooperation for this assumption. Each firm is free to assume the entry and exist as this assumption cannot affect the strategies of other firms in the market, therefore there would be no collusion between firms.

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.