Oligopolist A is considering a price reduction. The payoff from this strategy depends on the behavior of Oligopolist B. If Oligopolist B also reduces price, then Oligopolist A will earn a profit of $50,000. If Oligopolist B does not reduce price, then Oligopolist A will earn a profit of $100,000. The situation is symmetrical; that is, if Oligopolist B reduces price and Oligopolist A doesn't, then Oligopolist B will earn a profit of $100,000, and if both oligopolists reduce their prices, then Oligopolist B will earn a profit of $50,000. If neither oligopolist reduces price, then both will continue to earn profits of $75,000. What can Oligopolist A and Oligopolist B be expected to do in the absence of collusion?
A) Both will refrain from reducing price.
B) Both will reduce price.
C) Oligopolist A will reduce price, but Oligopolist B won't.
D) Oligopolist B will reduce price, but Oligopolist A won't.

Question

Quizplus · Accepted Answer

In the absence of collusion, both oligopolists are likely to reduce their prices to avoid being undercut by the other, leading to a situation where both earn $50,000 instead of risking earning less by not reducing prices while the other does.

Oligopolist a Is Considering a Price Reduction