CFA Practice Question

CFA Practice Question

An oligopoly is more likely to operate collusively when ______
A. Demand conditions in the industry are unstable.
B. There are high barriers to entry.
C. There are a larger number of oligopolists in the industry.
Explanation: Oligopolists have a strong incentive to collude since they can profit by restricting output and raising price.

User Contributed Comments 5

User Comment
Jurrens oligopolies must have high barriers of entry to even exist, do they not? So the question doesn't really make too much sense.
MaresaJaden It doesn't but you can reason through it anyway. If there are a larger number it will be harder to coordinate (ruling out C), if demand conditions are unstable that does not make price setting efficient as prices will fluctuate with changing demand.
indrayudha I think question is ok, plus Maresa's reasoning.
Sheeb I agree. Don't oligopolies already have high barriers on entry by their nature.
pigletin the already high barrier does not mean can't enter.
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