CMA Foundation · Fundamentals of Business Economics and Management · Forms of Market
In the price leadership model of oligopoly, which statement is correct?
In price leadership, a dominant firm, often the largest or lowest-cost one, sets the price and the other oligopolists follow it without any formal agreement. This differs from a cartel, which relies on explicit agreement on prices or quotas.
- AAll firms must be of equal size and set prices simultaneously
- BA dominant firm sets the price and other firms follow itCorrect
- CFirms sign a legally binding contract on output quotas
- DEach firm ignores rivals when setting its price
Explanation
Under price leadership, usually a large or low-cost dominant firm announces price changes and the other firms adopt them without a formal agreement. Option C describes a cartel, and option D contradicts interdependence. Equal size and simultaneous pricing are not features of this model.
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