Multiple Choice QuestionWhy is collusion unlikely in a monopolistically competitive industry?Multiple choice question.Each firm has a relatively small percentage of the market.The industry has a relatively large number of firms.Entry into and exit from the industry are relatively difficult.Firms in the industry have a high level of interdependence.
Question
Multiple Choice QuestionWhy is collusion unlikely in a monopolistically competitive industry?Multiple choice question.Each firm has a relatively small percentage of the market.The industry has a relatively large number of firms.Entry into and exit from the industry are relatively difficult.Firms in the industry have a high level of interdependence.
Solution
The answer is: Each firm has a relatively small percentage of the market and The industry has a relatively large number of firms.
In a monopolistically competitive industry, each firm controls a small part of the market because there are many firms in the industry. This makes collusion, or cooperative agreement to control prices or exclude other businesses, unlikely. If one firm decided to raise prices, consumers could easily switch to a competitor's product.
Additionally, the large number of firms in the industry makes it difficult to coordinate and maintain a collusion agreement. Each firm would have to agree to the collusion, and then trust each other to stick to the agreement, which is unlikely given the competitive nature of the industry.
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