CFA Practice Question

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CFA Practice Question

Which of the following is not an obstacle to collusion?

A. A large number of firms
B. Difficulty in detecting cheating on the collusive agreement
C. Barriers to entry
D. Unstable market demand
Correct Answer: C

Free entry and exit is an obstacle to collusion since the new rivals will cut into the cartel's market and reduce the market price.

User Contributed Comments 5

User Comment
TheHTrader How to understand "unstable market demand" as an obstacle to collusion?
sebou If market demand is unstable, the incentive to deviate becomes larger. Say market demand is at 10 and profit for a firm under the collusive agreement is at 2.

Scenario a (stable demand): By reducing the price slightly, a firm captures the whole demand and earns roughly 20

Scenario b (unstable demand): Demand increases to 20. By deveating, a single firm can earn 40 due to the higher demand

A firm will always compare the payoff from the collusion agreement with the payoffs from deviating. If demand is unstable, opportunities arise more frequently where deviating carries higher value than sticking to the agreement.
Shaan23 It says barriers to entry but what does that mean? High barriers to entry or low? If there's low barriers to entry that will be an obstacle to collusion cause there would be many firms.

Shaan23 it...there saying there is barriers to entry....
schweitzdm Tricky question. If it said "lack of barriers to entry" then it would be an obstacle.

Existing barriers to entry help to enable collusion.
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