Assume that in an effort to discourage competitors, firm X has lowered its price below its average total costs of production. This is an illustration of the limit pricing form of strategic entry deterrence.
73) Predatory pricing will be most effective when the costs structures of the firms in an industry, including potential entrants into the market, are identical or at least very similar.
74) In the case of Matsushita v. Zenith, the fact that the foreign television manufacturers were able to charge lower prices than their domestic competitors in the U.S. market for televisions was sufficient evidence to conclude that the Japanese firms were engaged in predatory pricing.
75) A predatory pricing strategy will have the greatest chance of success when the predatory price is set below the cost of the firm's competitors, new rivals are unlikely to enter after the strategy ends, and profits can be recouped in a relatively short period of time.
76) The overriding objective of a cartel is to maximize the amount of profit each of its members can earn through cooperation with the other members.
77) To maximize joint profits, the members of a cartel have to determine the level of industry output by setting marginal revenue qual to the cartel's joint marginal costs of production.
78) Assume a cartel that consists of two firms has determined its profit-maximizing level of output and must now decide how to allocate total output between the two firms. Assuming firm A's marginal costs are less than firm B's marginal costs, firm A should produce a smaller share of total output than firm B.
79) Because cooperation dominates noncooperation as a strategy for maximizing profits, cheating is rarely if ever an issue that cartels have to contend with.
80) All else constant, a cartel agreement will become more difficult to enforce as the number of firms competing the market increases and the members of the cartel produce a differentiated product.
81) OPEC has had a sustained effect on the price of oil since it was first founded in 1960.
82) Because there is no formal agreement among the participating firms, firms that engage in tacit collusion are exempt from prosecution under the anti-trust laws.
83) Although tacit collusion can enhance the price-setting power of the participating firms, it can also result in greater efficiency in production, which also benefits society. Thus, it is not immediately clear, a priori, when tacit collusion actually hurts or helps consumers.
84) A firm acting as a price leader would never reduce market price because this would clearly make all of the firms in the market worse off and defeat the purpose of having a firm act as the price leader.
85) Assume a monopolist regularly posts price increases three months in advance of when they will take effect. After a small number of new firms enter the market, the original firm continues the practice of announcing price increases in advance. Following the court's logic in the Ethyl case, the firms in this market would not be guilty of price fixing behavior.
86) Price coordination among firms will be more difficult when there are substantial differences among the cost structures of the competing firms and the technologies they employ.
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