In a duopoly, if one firm increases its price, then the other firm can
A) keep its price constant and thus increase its market share.
B) keep its price constant and thus decrease its market share.
C) increase its price and thus increase its market share.
D) decrease its price and thus decrease its market share.

Question

Quizplus · Accepted Answer

If one firm in a duopoly increases its price, the other firm can keep its price constant and therefore attract more customers, thus increasing its market share. This is known as a price-matching strategy. By keeping its price constant, the firm can maintain its market share or even increase it, since consumers may switch to the other firm in response to the price increase by the first firm. Therefore, choice A is the best answer.

In a Duopoly, If One Firm Increases Its Price, Then