Question

Do cost reductions in oligopolies usually lead to price reductions? a. always b. never c. sometimes, if the government permits it d. sometimes, but only if the oligopolists choose to use lower prices to expand the market and/or their market share e. sometimes, if arbitrage can be eliminated

Answer 1

Option D

When costs are reduced firms in oligopoly finds it attractive to expand production and hence output in order to maximize profits . So when costs decreases firms decreases prices sometimes in order to expand output and increase market share.

Hower if they don't expand output then

Due to high demand because of less priced, firms will not be able to entertain all the demands of the consumers . And other firms will also interpret the lower prices in order to save their market share .

Price war and competition will start.

So demand curve will become inelastic according to kinked demand theory

So if firms are decreasing prices then they should also expand.

However not all time all firms will lower prices in order to avoid price wars and competition