Firms A and B are within an oligopolistic market. Firm A lowers the price for one of its goods and in retaliation, firm B decides to set a policy that will keep the price for its comparable good lower than firm A's. Based on the given information, which statement is TRUE?
A) Firm B is engaging in a trembling hand trigger response.
B) Firm B has higher variable costs.
C) Firm A has higher variable costs.
D) Firm B is engaging in a grim trigger response.

Question

Quizplus · Accepted Answer

Firm B's decision to set a policy that will keep its prices lower than Firm A's in retaliation is an example of a grim trigger strategy. This strategy is a form of punishment aimed at deterring Firm A from lowering its prices again, by committing to a long-term strategy of keeping prices low. This does not necessarily relate to the variable costs of either firm, nor does it indicate a trembling hand trigger response, which involves a strategy that allows for occasional deviations from the equilibrium strategy.

Firms a and B Are Within an Oligopolistic Market