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?
In an oligopoly market structure, where there are only a few dominant firms, like in the case of Cargill Corp. and the chicken growth hormone market, it is not surprising to find price changes happening simultaneously among these firms for a few reasons:
1. Interdependence: In an oligopoly, firms are interdependent on each other. This means that the actions of one firm can have significant effects on the others. If one firm decides to change its price, they know that the other firms will likely follow suit, as they are all aware of the likely impact on market dynamics.
2. Market Transparency: In an oligopoly, firms closely monitor each other's actions and market conditions. They are quick to react to any price changes made by competitors. Due to the limited number of players in the market and the nature of the industry, it is relatively easy to observe and respond to price adjustments.
3. Mutual Benefit: Even in the absence of explicit collusion or price fixing, firms in an oligopoly can benefit from maintaining stable prices. If one firm drastically lowers its price to gain a competitive advantage, the other firms may perceive this as a threat and respond by matching the lower price. By simultaneously adjusting prices, the firms can avoid price wars and maintain stable profit margins.
It is important to note that these reasons suggest a pattern of simultaneous price changes. However, it does not imply illegal or collusive price fixing, as firms may independently respond to market conditions or competitors' actions.
In an oligopoly market structure, where there are only a few firms controlling the majority of the market, it is not surprising to find that all the firms change prices simultaneously, even without explicit price fixing. This phenomenon occurs due to the interdependence and strategic behavior of firms in an oligopoly.
To understand why this happens, we need to consider the dynamics of competition in an oligopoly. In this market structure, the actions of one firm directly impact the other firms in the market. If a firm decides to decrease the price of its product, it will likely attract more customers, potentially leading to higher market share and profits. This, in turn, puts pressure on the other firms to respond in order to maintain their market positions.
Moreover, in an oligopoly where the products are essentially undifferentiated, such as chicken growth hormone in this case, customers do not have strong preferences for one firm's product over another. As a result, firms cannot compete through product differentiation, which further intensifies their focus on price competition.
Given these circumstances, it becomes a rational strategy for firms in an oligopoly to closely monitor each other's pricing decisions. When one firm changes its price, causing a potential shift in market share, the other firms quickly respond to prevent losing customers or market power. This response usually happens within minutes, as mentioned in the testimony, to ensure that they remain competitive and avoid any disadvantageous position.
It's important to note that simultaneous price changes in an oligopoly can occur even in the absence of an explicit agreement or collusion among the firms. This behavior is known as tacit collusion or conscious parallelism, where firms indirectly coordinate their pricing decisions through their market understanding and strategic behavior. It is a consequence of the natural incentives and dynamics present in an oligopolistic market structure.
Therefore, in this particular case with Cargill Corp. and the market for chicken growth hormone, the executive identified the simultaneous price changes as a result of the oligopoly structure, where firms respond to each other's pricing actions to maintain their market positions and maximize their profits.