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?
These companies are competitors. They can't afford to charge a higher price for the same product or they'll lose their sales.
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?
a small business
It is 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, for the following reasons:
1. Interdependence: In an oligopoly, firms are aware that their pricing decisions can directly impact their competitors' market share and profitability. As a result, they tend to closely monitor and respond to each other's actions. This interdependence creates an incentive for firms to match price changes made by their competitors to maintain their market position.
2. Mutual Observation: Due to the small number of firms involved, oligopolistic competitors often have a strong awareness of each other's pricing strategies. They monitor market conditions, observe price changes made by rivals, and respond accordingly. This mutual observation increases the likelihood of simultaneous price adjustments.
3. Price Leadership: In some cases, one dominant firm in the oligopoly may take the lead and change its prices. Other firms then follow suit, considering the leading firm's pricing decision as a signal of changing market conditions. This phenomenon is known as price leadership, where one firm sets the price and others follow.
4. Avoiding a Price War: Oligopolistic firms, recognizing their interdependence, often prefer to avoid aggressive competition that could lead to a price war. By coordinating price changes, they can maintain stability and avoid significant fluctuations in prices, ensuring profitability for all firms involved.
To summarize, the combination of interdependence, mutual observation, price leadership, and the desire to avoid a price war all contribute to the simultaneous price changes in an oligopoly, even without explicit price fixing.