Tacit Collusion Is Likely When Firms Have Different Strategi

1 Tacit Collusion Is Likely To Occur When Firms Have Different Market

1. Tacit collusion is likely to occur when firms have different market shares. true or false?

2. Suppose walmart buys fresh roses from several hundred small backyard gardeners in California. These gardeners are very likely to be able to engage successfully in tacit collusion. True or false?

3. Toby operates a small deli in a monopolistically competitive restaurant industry. In long-run equilibrium, the profit-maximizing price of the three-meat sandwich is $3. Price also equals his average total cost. Toby's minimum average total cost is less than $3. True or false?

4. Relying on brand names will always lead consumers to the best consumption choices if they buy the brand name rather than a cheaper substitute. True or false?

5. If a perfectly competitive firm chooses its level of output so that the price equals marginal revenue, the value of the marginal product of labor will equal the wage rate. True or false?

Paper For Above instruction

The concept of tacit collusion and its occurrence under different market conditions is a significant topic in microeconomics, particularly concerning market structure and firm behavior. Tacit collusion refers to an unspoken understanding between firms to limit competition, fix prices, or share markets without explicit communication or formal agreements. This essay explores the specificity of conditions—particularly market share disparities and market types—that influence the likelihood of tacit collusion, alongside discussions on related economic concepts illustrated by the provided statements and questions.

Firstly, the assertion that tacit collusion is likely to occur when firms have different market shares is generally false. Classical economic theory posits that collusion is more feasible among firms with similar market power, largely because comparable market shares facilitate mutual understanding and stable cooperation. Firms with significantly different market shares are less inclined or less able to sustain collusion, as dominant firms may act unilaterally, and smaller firms might struggle to influence market prices or behavior meaningfully. Furthermore, differences in market shares often lead to conflicting incentives—larger firms may prefer to dominate aggressively, while smaller firms may seek to avoid antagonizing the larger players—thus making tacit collusion less stable or less likely in such scenarios. Empirical studies support this, indicating that similar market shares foster conditions more conducive to covert collusive behavior (Connor, 2001; Stigler, 1964).

Secondly, regarding Walmart's purchase of roses from numerous small backyard gardeners, it is highly unlikely that these small individual suppliers could successfully engage in tacit collusion. Tacit collusion depends heavily on the ability of firms to monitor, signal, and reciprocate cooperative behavior, which is practically impossible among a large number of small, decentralized, and heterogeneous suppliers. Each gardener’s independent operation and limited communication capacity reduce the feasibility of maintaining tacit agreements. Moreover, the low market share of any individual gardener relative to Walmart diminishes their influence over market prices or collusive arrangements. Consequently, the complexity, the large number of participants, and the lack of coordinated communication undermine the prospects for successful tacit collusion in this context (Tirole, 1988).

Thirdly, in the case of Toby’s small deli operating in a monopolistically competitive environment, several concepts are at play. In long-run equilibrium, where firms earn zero economic profit, the price equals the average total cost (ATC), and this price is typically above the minimum ATC due to monopolistic competition's downward-sloping demand curve. The scenario states that the profit-maximizing price for the three-meat sandwich is $3 and that this price equals Toby’s ATC, which implies zero profit. Since the price also equals ATC at equilibrium—but the question specifies that Toby's minimum ATC is less than $3—it indicates that Toby is producing at an output level where ATC is decreasing and not at its minimum. Hence, the statement that Toby’s minimum ATC is less than $3 is true because, in monopolistic competition, equilibrium occurs at a point where the average total cost is decreasing or tangent to the demand curve, not necessarily at its minimum point. The reason is that in the long run, firms adapt their production to maximize profit or minimize loss, often operating with ATC above its minimum (Pindyck & Rubinfeld, 2018).

The fourth statement claims that reliance on brand names always leads consumers to the best consumption choices. This is false because brand names are primarily driven by marketing, brand loyalty, and perceived quality rather than necessarily being the most cost-effective or best option objectively. Consumers might believe that a brand name guarantees quality or value, but this does not always hold true. Cheaper substitutes may offer comparable or superior quality at a lower cost, and assumptions that brand-name products are inherently better can lead to suboptimal consumption decisions. Market failure can occur if consumers overpay for brand names or are influenced by marketing rather than product attributes, indicating that reliance on brand names does not always translate to the best choices (Kamenica, 2012; Nelson, 1970).

Finally, the assertion that in perfect competition, the marginal product of labor (MPL) equals the wage rate when the firm chooses its output level at price equals marginal revenue (MR) is correct under the assumptions of perfect competition. In such markets, price equals marginal revenue by definition. The firm maximizes profit by setting marginal cost (MC) equal to marginal revenue, which includes the MPL in the marginal cost calculation—in particular, the marginal cost of labor is the wage rate. When the firm hires labor up to the point where MPL multiplied by the price (which equals MR) equals the wage, the value of the marginal product of labor (VMPL) equals the wage rate. This equality indicates profit-maximizing employment of labor resources, aligning with the theory underpinning perfectly competitive markets (Samuelson & Nordhaus, 2010).

References

• Connor, J. M. (2001). Global Price Fixing, Cartels, and Trade Competition. Kluwer Academic Publishers.
• Nelson, P. (1970). Information and Consumer Behavior. Journal of Political Economy, 78(2), 311-329.
• Pindyck, R. S., & Rubinfeld, D. L. (2018). Microeconomics (9th ed.). Pearson.
• Samuelson, P. A., & Nordhaus, W. D. (2010). Economics (19th ed.). McGraw-Hill Education.
• Stigler, G. J. (1964). A Theory of Oligopoly. Journal of Political Economy, 72(1), 44-61.
• Tirole, J. (1988). The Theory of Industrial Organization. The MIT Press.