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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 ...

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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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Oligopoly

Testifying at a price fixing trial involving Cargill and the market for chicken growth hormone, in which Cargill is one of only three firms worldwide, an executive 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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