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LG and Hewlett— Packard are two firms in the market for computer monitors. Suppose each firm generally announces its prices by sending price lists to customers 60 days in advance of the effective date. Other manufacturers of computer monitors, such as Acer and Dell, are able to observe these price announcements. 1. How does this business practice of price preannouncements differ from a precommitment strategy? Explain. 2. What might managers of LG and Hewlett-Packard hope to achieve with these price preannouncements? 3. Do price preannouncements have the potential to enable explicit or tacit collusion? Explain.

User Ishmeet
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1. Price preannouncements differ from a precommitment strategy in that precommitment involves a firm committing ahead of time to a certain price or pricing strategy, while price preannouncements involve a firm announcing a future price change without necessarily committing to that change. Precommitment strategies often involve more firm commitment and may be more effective in deterring competitors from undercutting prices.

2. The managers of LG and Hewlett-Packard might hope to achieve several things with their price preannouncements. First, they can signal to customers and competitors that they plan to maintain or increase prices, potentially deterring competitors from entering the market and attracting new customers. Second, they can use the preannouncements as an opportunity to gauge customer and competitor reactions to their prices, allowing them to adjust their pricing strategies if necessary. Finally, they can use the preannouncements to manage the timing of price changes, such as by avoiding sudden or unexpected price changes that could disrupt customer relationships.

3. Price preannouncements do have the potential to enable explicit or tacit collusion, depending on how they are used. If competitors coordinate their preannouncements or use them as a way to signal each other about pricing strategies, it could be considered explicit collusion. However, if competitors independently preannounce their prices for their own reasons, it might be considered tacit collusion if they all end up following similar pricing trajectories. Overall, price preannouncements can potentially facilitate collusion among firms, but this is not necessarily the case and can depend on the broader market context and regulatory environment.

User Brian Brinley
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