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Suppose two firms in a duopoly implicitly collude and charge a high price
Suppose two firms in a duopoly implicitly collude and charge a high price. How might each firm benefit from advertising that it will match the lowest price offered by its competitor?
a. The advertisement is meant to suggest to consumers that the offered price is actually the lowest price available.
b. The offer to match prices is a way of signaling to antitrust authorities that the firms are not engaged in illegal collusion.
c. The offer to match prices is a way of deterring entry by other large firms, thereby keeping the market share of the existing firms intact.
d. The advertisement ensures that the other firm does not cheat. If a firm cheats on the agreement and charges the lower price, the rival firm will retaliate by doing the same.
Expert Solution
(d.) The advertisement ensures that the other firm does not cheat. If a firm cheats on the agreement and charges the lower price, the rival firm will retaliate by doing the same.
A duopoly occurs when two companies or suppliers have control over the market of a specific product or service. By advertising that one firm will match the other's prices, it ensures that the other firm won't cheat on the agreement. They are colluding and working together to charge a higher price to the consumers. Because they are the two main firms in the market, consumers will still buy their product(s).
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