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March 25, 2017

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can someone please help me with this question?

Testifying at a price fixing trial involving Cargill Corp. and the market for chicken growth hormone, (in which 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 and usually within minutes."

Why is it not surprising to find that in an oligopoly with very few firms each of which sells a basically undifferentiated product like chicken growth hormone, all the firms change prices simultaneously, even if there is no explicit price fixing?

  • micro_economics - ,

    These companies are competitors. They can't afford to charge a higher price for the same product or they'll lose their sales.

  • micro_economics - ,

    I agree with Ms Sue's Answer.

    That said, the theory of the Oligopoly is a complicated one. With a oligopoly, the possibility of collusion exists, even if it is not explicitly observed. That is, the firms have agreed, well in advance, that whenever one firm changes it's price, the others will follow.

    Second, you can get the result you describe if the oligopoly faces a "kinky" demand curve. Here, there is a "kink" in the demand curve, Where price is highly elastic above the current market price and highly in-elastic below. Here, it is possible that if one firm lowers price, the others will follow.

    A third possiblility exists when the, for technical reasons or from government regulation, oligopoly firms compete with each other on a dimension other than price. E.g., what if there is a crazy govt regulation that firms must buy their growth hormone from the lowest bidder?

  • micro_economics - ,

    a small business

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