2. Which of the following factors increase the likelihood that an oligopolist will collude with other firms in the industry? Which of these factors increase the likelihood that an oligopolist will act noncooperatively and raise output? Explain your answers.
The firm’s initial market share is small. (Hint: Think about the price effect.)
The firm is likely to act noncooperatively and raise output, which will generate a negative price effect. But because the firm’s current market share is small, the negative price effect will fall much more heavily on its rivals’ revenues than on its own. At the same time, the firm will benefit from a positive quantity effect.
The firm has a cost advantage over its rivals.
The firm is likely to act noncooperatively and raise output, which will generate a fall in price. Because its rivals have higher costs, they will lose money at the lower price while the firm continues to make profits. So the firm may be able to drive its rivals out of business by increasing its output.