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Oligopoly Market Structure: Price Fixing in an Oligopoly

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

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

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In an oligopoly, perfect substitutes are available. Consumers will buy from the company that offers the lowest available price for the quantity demanded, under usual circumstances. This leads to a situation where the small number of companies that make up the oligopoly closely monitor all changes in prices of their competitors. If they fail to ...

Solution Summary

The solution explains why it is not surprising to find that in an oligopoly all the firms change prices simultaneously, even if there is no explicit price fixing.

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