Question

1. Consider two industries, Alpha and Beta, each of which has 8 firms. Suppose Alpha is growing at a rate of 9%, while Beta is growing at a rate of -25%, and that there is an 80% chance that the industry will continue in the next period for Alpha, but a 100% chance for Beta. Assume the interest rate is 10%. In which industry do you think tacit collusion is more likely to take place? Briefly justify your answer.

Answer 1

Data indicates that the Industry A is growing and industry B is not growing and

In an oligopoly market because there are so few firms, each firm can have some degree of pricing power, which can result in substantial profits. Another by- product of the oligopoly market structure is the attractiveness of price collusion. Even without price collusion, a dominant firm may easily become the price maker in the market. Oligopoly markets without collusion typically have the most sophisticated pricing strategies.

Since Industry B is falling and has the very high no of firms it is very likely that this industry will face collusion.