There are two firms in an industry,and their products are perfect substitutes for each other.Each firm had a market share of 50 percent and charged equal prices.However,when the demand for the good declined because of a recession,Firm A lowered its price to increase its sales.Firm B responded by lowering its price further.This is an example of the ________ of oligopoly.

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Quizplus · Accepted Answer

The situation described is an example of the Bertrand model, where firms compete by setting prices instead of quantities. In this case, both firms are assumed to have the same cost structure, so they will lower their prices to capture a larger market share. This results in a price war until the price falls to the point where both firms are just earning normal profits. This model assumes that firms have full information about each other's prices and can adjust their own prices accordingly, which seems to be the case in the scenario described.

There Are Two Firms in an Industry,and Their Products Are