Question

2 firms in an oligopoly environment that did not colluded previously on their advertising levels but have now been able to achieve tacit collusion on their advertising levels. If advertising in this industry serves to steal consumers from a rival, achieving tacit collusion means ad expendenitures will decrease. But if advertising serves the role of shifting out industry demand curve, tacit collusion has no effect on advertising.

True, partly true, or false and please explain your answer.

Answer 1

The given statement is true.

Explanation: tacit collision is a situation in which a firm does not compete with its competitors so that his competitors does not retaliate.

In the given case, we know that advertising may lead to tacit collusion that will help in reduction of the expenditure but if advertising will actually help ok increasing the sales of the firm then tacit collusion will not have any affect on the advertising. This is true because once a firm is able to increase its sales, then there is no going back and it will not let tacit collusion affect it's sales and his demand curve.

So to conclude, we can say that the given statement is true and in if advertising will increase the demand of the firm then tacit collusion will not play any role in it.