Which of the following best explains why U.S. companies in an oligopoly tend to have similar prices?

• A. Consumer demand is perfectly elastic, forcing identical pricing.
• B. Firms are interdependent and often engage in price matching to avoid price wars.
• C. Oligopolies always operate as monopolies and set prices together.
• D. Government regulations require all firms to charge the same price.

Answer: (B)

Verified step by step guidance

1. Understand the nature of an oligopoly: It is a market structure where a few firms dominate the market, and each firm's decisions affect the others.
2. Recognize the concept of interdependence: In an oligopoly, firms are aware that their pricing and output decisions will influence their competitors' actions.
3. Analyze why firms might avoid price wars: If one firm lowers its price, others may follow, leading to reduced profits for all. To prevent this, firms often match prices to maintain stability.
4. Evaluate the incorrect options: Perfectly elastic demand is rare in oligopolies; oligopolies do not always act as monopolies; and government regulations do not typically mandate identical pricing.
5. Conclude that the best explanation is that firms in an oligopoly tend to have similar prices because they are interdependent and engage in price matching to avoid destructive price competition.