Question

Ceteris paribus, what would happen to a standard collusive agreement under oligopoly given each of the following situations? In each blank, write either “strengthen” or “weaken”.      Each blank is worth 1 point.

            a) the barriers to entry for the industry are incredibly weak

                                    _______________________________________________

            b) each firm produces a homogeneous product

                                    _______________________________________________

           

c) each firm has an identical cost structure

                                    _______________________________________________

            d) there is a very large number of firms in the agreement

                                    _______________________________________________

Answer 1

A. The barriers to entry for the industry are incredibly weak - Weaken

Even in monopoly or oligopoly, the existing companies will behave competitively when there is a lack of barriers, such as government regulation and high entry costs, to prevent new companies from entering the market, thus weakening the monopoly/oligopoly.

B. Each firm produces a homogeneous product - Strengthen

If the firms produce a homogeneous product, like cement or steel, the industry is called a pure or perfect oligopoly.

C. Each firm has an identical cost structure - Strengthen

Because the firms in oligopoly are interdependent and have limited number of competitors in the market, they are likely to change their prices according to the competitors. For example, if Coca-Cola changes their price, Pepsi is also likely to.

D. there is a very large number of firms in the agreement - Weaken

When the number of firms in an oligopoly increases the competition rises: Thus weakening the oligopoly.