Suppose Two Firms in a Duopoly Implicitly Collude and Charge

question 144

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 signalling 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.

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Definitions:

Notes Receivable

A customer’s written promise to pay an amount and possibly interest at an agreed-upon rate; amounts that customers owe for which a formal, written instrument of credit has been issued.

Direct Write-Off Method

A method of accounting for bad debts that involves charging unpaid accounts directly to the expense account when they are determined to be uncollectible.

Bad Debt Expense

The operating expense incurred because of the failure to collect receivables.

Account Receivable

Account Receivable represents funds owed to a company by clients or customers who have purchased goods or services on credit.