Provide a short answer to each of the questions below write

Provide a short answer to each of the questions below (write no more than 2-3 sentences).

a) Do practices like “Most Favored Customer Clause” and “Lowest Price Guaranteed” facilitate or hinder collusion among firms?

b) Name 4 structural features of a market that facilitate cooperation among firms.

c) How does the “hold up” problem affect the “make” vs “buy” decision?

Solution

Ans. A) There are argue about these practices, few said that MFC clause can play an important role and act as a facilitating factor. It provides coordination to competitors which reduces the encouragement for a seller to offer a lower price to a buyer and for other buyers it will helps to negotiate with seller in terms of obtain lower price. Whereas, it is also argued that MFC clause can increase cost of entry for new competitors. this clause prevent the ability of new competitor to enter the market and compete because dominant players always offers better or same condition which new competitor would offer. Hence MFC practice is true in both ways that is it facilitates and also can hinders collusion among firms. Likewise Many study has showed and argued about whether Lowest prize Guaranteed facilitate or hinder collusion among firms. Lowest prize guarantee seems less relevant in consumer goods market because prices to consumers are clearly mentioned.

Ans B) Four structural features of a market that facilitate cooperation among firms are 1) Perfect Competition

2) Monopolistic Competition

3) Monopoly

4) Oligopoly

Ans C) Hold up can affect the make or buy decision by reducing the trust which will hinders the investment or leads to under investment in assets. The hold-up problem leads to inefficiency when the buyer is reluctant to make the investment by creating the situation of insecurity and fear that the supplier will take full advantage and undertake the bargaining power, in which case the supplier is ‘holding up’ the buyer.