Question

This chapter discusses companies that are oligopolists in the market for the goods they sell. Many of the same ideas apply to companies that are oligopolists in the market for the inputs they buy. If sellers who are oligopolists try to increase the price of goods they sell, the goal of buyers who are oligopolists is to try to decrease the prices of goods they buy.

Major league baseball team owners have an oligopoly in the market for baseball players.

The owners' goal is to keep players' salaries   .

True or False: This goal is difficult to achieve because teams can attract better players with higher salaries.

True

False

Baseball players went on strike in 1994 because they would not accept the salary cap that the owners wanted to impose.

True or False: The owners felt the need for a salary cap to help prevent any team from cheating.

True

False

Answer 1

1.True

In case of is Oligopoly it is natural that with a few players in the market, there will be an intense competition among the sellers. Any move taken by the firm will have a considerable impact on its rivals. Thus, every seller keeps an eye over its rival and be ready with the counterattack.

The goal of keeping salaries low is difficult to achieve because each team has an incentive to cheat on any agreement, since they will be able to attract better players by offering higher salaries.

2.True

Cartels are inherently unstable. Each individual member has an incentive to cheat in order to make higher profits in the short run. Cheating may lead to the collapse of a cartel. With the collapse, firms would revert to competing, which would lead to decreased profits.

So owners resorted to Salary cap to help prevent future cheating.