Microeconomic Theory, Price Policy in Oligopoly
This cost-plus method of pricing is consisted with collusion or price leadership. If producer in an industry have roughly similar costs, adherence to a common pricing formula will result in highly similar prices and price changes.
Cost-plus pricing has special advantages for multiproduct firms, which would otherwise be faced with difficult and costly process of estimating demand and cost condition for perhaps hundreds of different products. In practice, it is virtually impossible to allocate correctly certain common overhead costs such as power, lighting, insurance, and taxes to specific products.
To sum up, oligopoly is an important market structure in modern economies because there are many industries in which the minimum efficiency scale is simply too large to support many competing firms. The challenge to public policy is to keep oligopolists competing rather than colluding, and using their competitive energies to improve products and to lower costs, rather than merely to erect entry barriers.
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