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Difficulty: EasyOligopoly: Characteristics, Types, and Price Interdependence

In an oligopolistic market, when a small number of major firms cooperate with one another to fix prices and restrict total industry output rather than competing, what economic term describes this agreement?

  1. CollusionAnswer
  2. B
    Price discrimination
  3. C
    Product differentiation
  4. D
    Natural monopoly

Answer

Collusion
Collusion refers to explicit or secret agreements between rival firms in an oligopoly to restrict competition, fix prices, and control market supply, effectively allowing them to maximize combined industry profits.

Step-by-Step Solution

1
Identify the key market behavior described in the question
The prompt describes mutual cooperation among dominant oligopolistic firms to fix prices and control supply.
Identifying the specific inter-firm behavior helps match it to standard economic terminology.
2
Match the behavior to its defined economic concept
The practice of competing firms agreeing to restrict rivalry by fixing prices or market shares is termed collusion.
Collusion allows oligopolists to eliminate price uncertainty and jointly act as a monopoly.

Key Concept

Collusion and Cartels in Oligopoly
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Topics

Oligopoly: Characteristics, Types, and Price Interdependence

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