• We are pleased to announce that the winner of our Feedback Prize Draw for the Winter 2024-25 session and winning £150 of gift vouchers is Zhao Liang Tay. Congratulations to Zhao Liang. If you fancy winning £150 worth of gift vouchers (from a major UK store) for the Summer 2025 exam sitting for just a few minutes of your time throughout the session, please see our website at https://www.acted.co.uk/further-info.html?pat=feedback#feedback-prize for more information on how you can make sure your name is included in the draw at the end of the session.
  • Please be advised that the SP1, SP5 and SP7 X1 deadline is the 14th July and not the 17th June as first stated. Please accept out apologies for any confusion caused.

Government and the Firm - Page 334

S

Sarahlouise_23

Member
I don't understand what the sentence "if producers exchange information on their price intentions it is a way of allowing price leadership, a form of tacit collusion, to continue". This is an example of an agreement to exchange information that could have the effect of reducing competition between firms. I think it's "price leadership" that I don't understand. Any explanation would be greatly appreciated. Thanks!
 
Price leadership just means that one firm (the "price leader", which is often the largest firm) sets its price for a product and then the other firms (the "followers") charge the same price for their products. More generally, if there is a group of large firms in an oligopoly (eg supermarkets, utility companies) and no single dominant leader firm, then the firms may match (ie copy) each other's prices. If this is the case, then it is less likely that any firm will drop its prices, as the other firms are likely to follow suit and they're all likely to make lower profits. However, prices rises are more likely to be followed / matched by other firms. So, overall prices are likely to be higher then if the firms instead competed, which is to the detriment of consumers.

Such price leadership by a single firm or price matching amongst a group of firms (its actually called "shadow pricing" at the bottom of page 186) is more likely to occur where the firms each know the prices charged by all the other firms. So one way to make this the case, and hence to increase their profits, is by actually agreeing to exchange information on prices and maybe also other things such as costs and product ranges.

Hence, if the government thinks this is happening and leading to higher prices, then it might intervene and make it illegal.
 
Back
Top