Suppose Two Firms in a Duopoly Implicitly Collude and Charge

question 74

Multiple Choice

Suppose two firms in a duopoly implicitly collude and charge a high price.How might each firm benefit from advertising that it will match the lowest price offered by its competitor?

• A)The offer to match prices is a way of deterring entry by other large firms, thereby keeping the market share of the existing firms intact.
• B)The advertisement ensures that the other firm does not cheat. If a firm cheats on the agreement and charges the lower price, the rival firm will retaliate by doing the same.
• C)The offer to match prices is a way of signaling to antitrust authorities that the firms are not engaged in illegal collusion.
• D)The advertisement is meant to suggest to consumers that the offered price is actually the lowest price available.