Oligopoly Market Structure: Price Fixing in an Oligopoly
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Testifying at a price fixing trial involving Cargill Corp. and the market for chicken growth hormone, (in which the Cargill is one of only three firms worldwide), an executive for Perdue said: "It's an oligopoly. When one (firm) changes price, they all do... usually within minutes."
Why is it not surprising to find that in an oligopoly which sells a basically undifferentiated product like chicken growth hormone all the firms change prices simultaneously, even if there is no explicit price fixing?
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Solution Summary
The solution explains why it is not surprising to find that in an oligopoly all the firms change prices simultaneously, even if there is no explicit price fixing.
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In an oligopoly, perfect substitutes are available. Consumers will buy from the company that offers the lowest available price for the quantity demanded, under usual circumstances. This leads to a situation where the small number of companies that make up the oligopoly closely monitor all changes in prices of their competitors. If they fail to ...
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