Firm A and Firm B are the only two companies that sell mail-order DVD rental subscriptions.For several years,Firm A priced its subscriptions below average variable cost.Firm B tried to compete by also selling subscriptions below average variable cost,but went bankrupt and exited the market.Several months after Firm B exited the market,Firm A raised prices by 40 percent and is currently earning large,positive economic profits.Based only on this information,an argument can be made that
A) Firm B must have made bad business decisions because it went bankrupt.
B) Firm A and Firm B must have had a collusive agreement.
C) the mail-order DVD rental subscription market is a monopolistically competitive market.
D) Firm B engaged in predatory pricing.
E) Firm A engaged in predatory pricing.

Question

Quizplus · Accepted Answer

Firm A priced its subscriptions below average variable cost for several years, which could be interpreted as predatory pricing to drive Firm B out of business. After Firm B exited the market, Firm A increased prices by 40 percent and is now earning large, positive economic profits. This suggests that Firm A was engaging in predatory pricing and is now exploiting its market power as a monopolist.

Firm a and Firm B Are the Only Two Companies