Question

three separate oligopolists in the same industry serve a city. company a is the dominant firm in the industry and produces a large share of the total output in the industry. companies b and c are rival firms, but they are much smaller than company a. company a sets its price at a level that maximizes its own profits. according to the theory of price leadership, what will companies b and c likely do? click or tap a choice to answer the question. set prices lower than company a set prices to match company a set prices higher than company a

Answer 1

Companies B and C will likely set prices to match Company A. This strategy follows the price leadership model typically observed in oligopolistic markets, where smaller firms align their pricing strategy with the dominant firm to maintain market stability and avoid detrimental price competition.

Step-by-step explanation:

In the situation described, where there are three separate oligopolists in the same industry and Company A is a dominant firm, the theory of price leadership suggests that the smaller firms (Companies B and C) will likely set prices to match Company A. This outcome occurs because Company A’s price setting provides an informal benchmark that the smaller firms follow, often due to the dominant firm's ability to produce at the lowest cost, or because it has a significant share of the market, or both. Therefore, by setting their prices equal to Company A, Companies B and C can ensure that they avoid price wars that could be detrimental to all firms in the industry.

In the context of collusion and cartels, if the firms were colluding formally, they would collectively produce the monopoly quantity and sell at the monopoly price to maximize total industry profits. Conversely, in the absence of collusion or with competition, firms might engage in price cuts to increase their market share, which could lead to a reduction in industry-wide profits to the point where they might earn zero economic profits, similar to perfect competition outcomes.