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IAI Actuarial Core Principles · Business Economics · Pricing strategies in the financial services sector

A bank prices a current account package using a price-leadership model: the dominant bank announces a fee change and smaller banks follow. Which feature most clearly distinguishes this from a formal cartel?

The distinguishing feature is that followers simply adjust to the leader's price change without any explicit agreement. This is tacit collusion, whereas a cartel relies on explicit arrangements such as joint price fixing or output quotas.

  1. AFirms sign a legally binding agreement on output quotas
  2. BFirms jointly fix prices through explicit meetings
  3. CFollowers adjust prices to the leader's move without an explicit agreementCorrect
  4. DAll firms charge different prices unrelated to each other
  5. Firms are price takers facing a horizontal demand curve

Explanation

Price leadership is a form of tacit collusion: followers align with the leader's announced price without any explicit agreement. A cartel involves explicit agreements on price or quotas. Price takers in perfect competition do not follow a leader but accept the market price.

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