💸principles of economics review

key term - Conscious Parallelism

Citation:

Definition

Conscious parallelism refers to a situation in an oligopolistic market where firms intentionally match their competitors' pricing and output decisions, without any explicit collusion or communication. This strategic behavior allows firms to maintain high prices and profits without the risk of antitrust scrutiny associated with price-fixing agreements.

5 Must Know Facts For Your Next Test

  1. Conscious parallelism allows oligopolistic firms to maintain high prices and profits without the risk of antitrust scrutiny associated with explicit collusion.
  2. Firms in an oligopoly are interdependent, meaning the actions of one firm can significantly impact the others, leading to conscious parallelism.
  3. Oligopolistic firms may engage in price leadership, where one firm sets the price and the others follow, as a form of conscious parallelism.
  4. The kinked demand curve model helps explain the reluctance of oligopolistic firms to change prices, as it reflects the interdependence and strategic behavior of firms in an oligopoly.
  5. Conscious parallelism can be difficult for antitrust authorities to detect and prosecute, as it does not involve explicit communication or agreements between firms.

Review Questions

  • Explain how conscious parallelism allows oligopolistic firms to maintain high prices and profits without the risk of antitrust scrutiny.
    • Conscious parallelism in an oligopoly allows firms to intentionally match their competitors' pricing and output decisions without any explicit collusion or communication. This strategic behavior enables firms to maintain high prices and profits without the legal risks associated with price-fixing agreements, which are prohibited under antitrust laws. By aligning their decisions, oligopolistic firms can effectively coordinate their actions and avoid the potential consequences of undercutting each other's prices.
  • Describe the role of price leadership in facilitating conscious parallelism within an oligopoly.
    • In an oligopolistic market, price leadership can be a form of conscious parallelism. One firm, usually the dominant player, sets the price, and the other firms then follow suit. This price leadership strategy allows the firms to coordinate their pricing decisions without explicit communication or collusion. The other firms in the oligopoly have an incentive to match the price leader's price to maintain their market share and avoid a potential price war. This interdependent behavior, where firms intentionally parallel each other's pricing decisions, is a key characteristic of conscious parallelism in an oligopoly.
  • Analyze how the kinked demand curve model helps explain the strategic behavior of firms engaging in conscious parallelism within an oligopoly.
    • The kinked demand curve model provides a useful framework for understanding the strategic behavior of firms engaged in conscious parallelism in an oligopoly. The kinked demand curve reflects the interdependence of firms in an oligopoly and their reluctance to change prices. Specifically, the model suggests that firms will be hesitant to raise prices, as they fear losing market share to competitors, but they will also be reluctant to lower prices, as they expect their competitors to match the price reduction. This interdependent behavior, where firms intentionally parallel each other's pricing decisions, is a key characteristic of conscious parallelism. The kinked demand curve helps explain how this strategic behavior allows oligopolistic firms to maintain high prices and profits without the risk of antitrust scrutiny associated with explicit collusion.

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