QUESTION: Testifying at a price fixing trial involving Cargill Corp. and the market for chicken growth hormone, (in which the Cargill is one of only three firms worldwide), an executive for Perdue said: "It's an oligopoly. When one (firm) changes price, they all do…Usually within minutes."
Why is it not surprising to find that in an oligopoly which sells a basically undifferentiated product like chicken growth hormone all the firms change prices simultaneously, even if there is no explicit price fixing? 4pts.
MY ANSWER: Firstly, an oligopoly is a form of market or industry that has a small number of firms or sellers who compete to remain competitive in the market. Due to the smaller number of firms in this type of market work under the conditions of imperfect competition. These few firms will make up a high percentage of the market and thus they are highly competitive and would keep an eye on the prices of their competitors in order to remain in the game. When one firm adjusts it’s price, the other firms are likely to follow to keep the market share they have and maintain equilibrium.
In the mentioned scenario above, the chicken growth hormone is said to be an undifferentiated product. This means the product to the consumer or buyer can be easily substituted for another firms product. Another example of an undifferentiated product would be gasoline. It’s easy to get it from another seller, and it does the same exact thing. Because it’s easy for the purchaser to switch to a different supplier of chicken growth hormone, Cargill and it’s 2 competing firms must keep a close eye on each other’s prices. If they do not (and their prices remain higher), its buyers would be able to switch to a competing firm due to it’s ability of obtaining the growth hormone but pay less.
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