Which of the following best describes a potential downside of equity alliances in the context of consumer surplus and willingness to pay?

• A. They may reduce competition, leading to higher prices and lower consumer surplus.
• B. They eliminate the need for firms to consider consumer surplus in pricing decisions.
• C. They guarantee that all consumers will pay less than their maximum willingness to pay.
• D. They always increase consumer willingness to pay by improving product quality.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of equity alliances. Equity alliances occur when firms take ownership stakes in each other to collaborate more closely, often reducing competition between them.
2. Step 2: Recall the definition of consumer surplus, which is the difference between what consumers are willing to pay for a good or service and what they actually pay.
3. Step 3: Analyze how reduced competition from equity alliances can affect prices. When competition decreases, firms may have more market power to raise prices.
4. Step 4: Connect higher prices to consumer surplus. If prices increase, the difference between willingness to pay and actual price shrinks, leading to lower consumer surplus.
5. Step 5: Conclude that a potential downside of equity alliances is that they may reduce competition, causing higher prices and thus lowering consumer surplus, which aligns with the correct answer.