Question

Oligopoly.

Suppose you own a gas station and the only other gas station in town is across the street from your gas station. Explain in general terms the two outcomes that you might expect to happen— in other words, if the gas stations collude, how would that differ from the gas stations competing? How would the profit of your station compare between the two outcomes and how would the prices charged to the consumers compare?

Give several reasons why collusion would be more likely in the above gas station case as compared with a farmer’s market that meets monthly and attracts approximately ten to twenty farmers. Explain each reason

Answer 1

There is just two gas station opposite to each other. Two market condition can appear:

Competitive: In this case price which customer pay will be equal to the marginal cost or average cost. Each will earn zero economic profit.

Collude: In this case price will be more than the competitive market and will earn a positive economic profit.

Gas station vs. Farmer:

Reason for easy collusion in gas station case:

a. Farmer goods are perishable in nature.

b. The number of farmers is more in numbers than the gas station.

c. There is a high chance of betrayal in case of farmers.

d. In gas station fixed cost is high and the Variable cost is low as compared to farmer's products.