Question from Past Microeconomics Qualifying ExamEdit
Fall 2005 - Section I, Question four, George Mason University
T, F, U. State first whether the following statements are true, false or uncertain. Then briefly explain your reasoning in four or five sentences. You may use a graph if it helps clarify your answer.
Dominance by one firm and simultaneity of price behavior is good evidence that sellers are colluding.
False. Simultaneity of price behavior is not necessarily evidence of collusion. A very competitive industry might be characterized by simultaneity of price behavior. An example might be the market for gasoline. Gas stations usually change their prices in response to competitors changing prices because of the price sensitive consumers in this industry.
- Monopolies also have the unique ability to price discriminate (with further assumptions like prohibitions on resell). This technique takes advantage of different demand curves for different types of consumers or as in perfect discrimination is able to charge each constomer exactly what they are willing to pay such that there is no consumer surplus left. A third strategy might include bundling. These signs of market power are contrary to the idea of charging one price.
Shouldn't the answer be Uncertain since it could be evidence of price collusion, but not necessarily? The question did not specify it is always evidence. If firms were colluding in price, wouldn't we expect simultaneity of price movements and continued dominance of a firm?
- Agreed. It's not necessarily collusive, but could be. A better indication of collusion would be some mechanism of enforcement, like a law, or club privilege, or commissioner. And to address the matter of one firm in dominance, if the industry as a whole exhibits Bertrand like behavior, then even as few as 2 firms could remain competitive.
False, it's not "good" evidence. It could simply mean that we are looking at a constant-return-to-scale industry, with firms of different sizes facing a very similar cost structure. (As noted above, the existence of an enforcement mechanism would be good evidence.)
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