Question

Firms in oligopoly must constantly think in terms of how other firms in the industry will react to whatever they do. Why do they have to do this? Why is it that firms in perfect competition and in monopoly don’t have to worry about how other firms will react?

Answer 1

Solution:

Firms in oligopoly must constantly think in terms of how other firms in the industry will react to whatever they do because, Oligopoly is a market situation in which the number of firms is low but every firm in the industry takes into account the reactions of competing companies when formulating a pricing policy. They are price-setters that can affect the market price and each firm is so large that its actions affect the market conditions, those companies are interdependent. Also, those who make huge profits in the long run are able to try to outperform their competitors by lowering their price at a lower price and spend on non-advertising strategies such as campaigns to advertise. Convince people to buy their brand and products. Therefore, there is a great interdependence, as oligopoly can greatly influence other companies. Accordingly, it is often seen together in oligopoly to reduce competition and increase profits for the two parties. This is known as a cartel formation.

Since there are few companies for oligopoly and very small companies for the other two companies, the interdependence of companies has a great role to play in oligopoly and not in perfect competition. Similarly, in perfect competition market structures, companies have very little effect on each other's sales. This is because there are so many of them that the customer of any one firm will not be affected so much that other companies will lose. This is especially so because in the long run, both of these market structures make modest profits; Therefore, they use non-competitive strategies such as advertising. However, they are unable to advertise much because of the limited budget from making a modest profit. They are also price takers and are unable to influence market prices.

And the thing with monopoly is, Monopoly arises when a firm that produces a product or service controls the market with no close substitute. I.e. a monopoly exists where a company, firm or entity is the sole - or dominant - force in which a product or service is sold in an industry. This gives the factor enough power to keep other competitors away from the market. This may be because the industry needs technology, high capital, government regulation, patents and / or high distribution overheads. Once a monopoly is established, the lack of competition can lead sellers to charge customers higher prices. The monopoly reduces the choices available to consumers. Monopolies are pure when there is no other option available in the market.

As to conclude, the interdependence of companies plays a major role in oligopoly, as companies are able to influence each other's profits to a large extent. For perfect competition and monopoly competition, companies are stand-alone units that are not affected by the presence of most other companies.

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