Question

Discuss in detail the methods available to Oligopoly firm to explain its price and quantity position in the short run.

Answer 1

Price leadership

In the oligopoly the domiant firm sets the price and other firms in the market follows the price set by the dominant firm. The dominant firm is able to change the price whenever they wanted. The oligopoly firms do not the price very much, they change their prices whenever there is a substantial change in the cost conditions of the firm. The firms do not change their prices for the small chages. If there is an increased inflation or the rise in the price for the inputs used in the production the oligopoly firms will definitely change their prices.

Limit pricing

The limit pricing model is used by the dominant firm in the market to drive out the new entrant in the oligopolist market. The dominat firm will set a low price for discourage the new entrant, so in the low price it will be difficult to survive in the market.

Contestable market model

In this model there is barriers to entry and the barriers to exit that will determine the price and the quantity decisions in the oligopolists market. If the barriers are high the firms will set a high price to maximize the profit and on the other hand if the barriers are low the firms will set a lower price to drive out the new competitiors from the market.

Collusion

It is a formal agreement between the oligopolists firms to control the price and the quantity demanded at the market. The collusion restricts the competition among the oligopolists firms. If any one of the firms cheat, that is lowering the price would lead to a price war and that will result a decreased profits for the oligopolists firms. The best example for collusion is the OPEC- Organization of the Petroleum Exporting Countries.