Question

with the aid of a diagram briefly explain the features of oligopoly.

Answer 1

An Oligopoly is a market structure characterized by few large firms. Automobile is an example of oligopoly market. As there are some barriers to entry. Firms sell differentiated products.

So no firm is a price maker and firms depend on each other for price determination.

So the demand curve is downward sloping.

In the diagram, we see a kinked demand curve. This happens due to difference in elasticities of demand. When the price is set too high by a firm, no other firm will follow ,So quantity demanded will fall and the demand will be elastic.

When the price is set too low, other firms will haveto lower the price in order to not lose the market share. so Quantity demanded will not fall. the demand will be inelastic.

Oligopoly inital equilibrium is at the kink.

The MR curve is vertical at the kink of demand curve because of price rigidities.

The oligopolistic market has the ability to continue the Positive profits even in the long run.

The profit maximising level is still MC=MR.

The profit maximising price level is at P1 and quantity is at Q1.