Question

In the long-run, it is more likely for two firms to collude with each other to form a cartel.

True or False (Figure out the possible error of the following questions and explain why it is not true)

Answer 1

Oligopoly is a market structure in which there are a few firms producing a product. Example- Cold drinks market, banks.

Firms colliding with each other does not have any relation with short run and long run. Firms collide for following reasons:

1. To earn higher profits.

2. To avoid price related competition.

It may be observed that by engaged in price competition, price wars will happen which will benefit consumers and firms may incur losses. Eg. Telecom operators in India.

It is also possible that there are laws which prohibit firms from colliding. Eg. Sherman act in USA.

Hence it is clear that when firms think alike then they can come together and has no impact of time. Statement made above is therefore false.