Question

Large firms offer a price umbrella (to smaller firms) only if the amount of profit ________.

a. they lose is greater than 10%

b. they lose, due to matching small firms’ lower price, is greater than the amount of profit they lose when maintaining their higher price

c. they lose, due to matching small firms’ lower price, is less than the amount of profit they lose when maintaining their higher price

d. they lose is less than 10%

Answer 1

In the price umbrella strategy, the larger and more dominant firm will allow the smaller firm to set a price equal to or less than the larger firm, and allow it to find customers accordingly.

The main condition is that, the larger firm should not lose any profits, or at least not so in relative terms.

Had the smaller firms maintained higher prices, the larger firm would have lost more profits.

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Therefore, the correct choice is:

Large firms offer a price umbrella (to smaller firms) only if the amount of profit:

c) they lose, due to matching small firms’ lower price, is less than the amount of profit they lose when maintaining their higher price