Question

If all small firms in an industry work together (cooperate) with a new large firm, would this be considered collusion? Explain

Answer 1

Yes. I agree with the statement. When firms collude they set price and output for the market to maximize market profit. This causes the price to be higher than the market clearing price and output to be lower. All firms want to maximize their profit so, the resulting profit maximising output and price will be equal to a monopoly. This is because firms who collude, reduce their individual output so that their collective output equals to a monopoly output which allows them to earn higher profit.