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Question
Firm A and Firm B are the only two companies that sell mail-order DVD rental subscriptions. For several years, Firm A priced its subscriptions below average variable cost. Firm B tried to compete by also selling subscriptions below average variable cost, but went bankrupt and exited the market. Several months after Firm B exited the market, Firm A raised prices by 40 percent and is currently earning large, positive economic profits. Based only on this information, an argument can be made that
a. Firm B must have made bad business decisions because it went bankrupt.
b. Firm A and Firm B must have had a collusive agreement.
c. the mail-order DVD rental subscription market is a monopolistically competitive market.
d. Firm B engaged in predatory pricing.
e. Firm A engaged in predatory pricing.
Answer
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