Question

Two beer-brewing companies, Piwo and Olut, operate in a duopoly Initially, they achieve tacit collusion, charging beer prices in excess of their marginal costs and earning substantial economic profit. Suppose new management at Piwo decides to cut prices In order to increase its market share and profit. In response, the management at Olut slashes its prices below marginal cost in an effort to push Piwo out of business. This is an example of:____________a. A cartel b. Price leadership c. A price war

Answer 1

Answer:

C. Price War

Explanation:

A price war is a situation that occurs between rival firms where one firm decides to reduce the price of its product in an attemp to gain a upper hand over its rival. The upper hand being targeted could be in form of capturing a greater market share, profitability or simply to push the rival out of the market.

In both situation both by Piwo and the response by Olut, the strategy is Price War. Piwo's new management's strategy to cut prices to gain larger market share and profit is a price war strategy. The response from Olut as well to cut its prices below margina costs to push Piwo out of business is also a Price War Strategy.

A cartel involves an agreement by a group of firms on market share as well as the price of products and every member is obliged to abide by this agreement while Price Leadership is a form of cooperation amongst firms, where a firm (the price leader) sets the price for the market and the rivals decides to follow the price set by the leader.