Question

Suppose an oligopoly consists of two firms. Firm A lowers price and Firm B responds by lowering its price by the same amount. If average costs and industry output remain the same, which of the following will occur?

Answer 1

Answer:

The profits for firma A and B will decrease.

Step-by-step explanation:

Oligopoly by definition "is a market structure with a small number of firms, none of which can keep the others from having significant influence. The concentration ratio measures the market share of the largest firms".

If the costs remain the same for both companies and both firms decrease the prices then we will have a decrease of profits, we can see this on the figure attached.

We have an equilibrium price (let's assume X) and when we decrease a price and we have the same level of output the area below the curve would be lower and then we will have less profits for both companies.