Final answer:
Price leadership is an example of implicit collusion as it involves an unspoken agreement among oligopoly firms to follow price changes set by a dominant firm without formal or legal arrangements. It prevents price wars, stabilizes the market, and enables firms to maintain higher profits, much like a monopoly, without breaching antitrust laws.
Step-by-step explanation:
Price leadership in an oligopoly reflects an example of implicit collusion because it demonstrates a form of non-communicated agreement among firms to follow the price changes set by a dominant company. In an oligopoly, firms are interdependent; the price and output decisions of one firm directly affect the market, prompting reactions from rival firms. Unlike explicit collusion, such as a cartel, there is no formal agreement or binding contract to fix prices or output levels among the companies. Without concrete communication, price leadership allows firms to coordinate their pricing strategies by signaling, with one firm (the price leader) effectively setting the price for the market.
When the price leader adjusts their price, other firms in the oligopoly follow suit to maintain relative pricing positions and market shares. For example, if a firm tries to raise prices but others don't follow, the firm raising prices would lose market share. On the other hand, if a firm lowers the price and others match the decrease, the competitive balance is maintained, but at lower profit margins. This tacit coordination enables the firms to avoid price wars, maintain stable prices, and collectively enjoy higher profits, resembling monopolistic behavior without explicitly violating antitrust laws. Price leadership thus promotes a silent collusion, which, while not legally enforceable, effectively controls the market in a manner advantageous to all participating oligopoly firms.