Question

2. Consider an oligopoly market where 8 major companies dominate the industry, Consider if the following conditions change, do you think the change would make the market more competitive or less competitive? Would it cause market prices to increase or decrease? Why?

a) Mergers of firms reduce the number of companies in the market

b) Technological progress lowers the fixed costs necessary to achieve the minimum efficient scale.

c) Product differentiation increases: a homogenous product becomes heterogeneous products

d) Increased ability of customers to obtain accurate information about price and quality

e) New technology improves the ability of firms to quickly and easily change production

f) Government regulations increase restrictions on entry and exit of producers into and out of the market

Answer 1

Answer 2:

a. The mergers of companies would reduce the number of firms operating in the market. As the number of firms decreases, this will make the market less competitive and as the markets become less competitive by reduction in the number of firms, the overall supply will decrease and this will lead to increase in the price level.

b. As the cost of production gets lowered, new firms will enter the market and this will increase the competition among exisitjng firms and new firms and as competition increases and new firms enter, the prices of the product would decrease.

c. As productd become heterogemeous, the competiton in the market will increase and as the competition in the market increases, the prices of the product would decrease.

d. As customer awareness increases, the competition in the market would increase and as competition in the market would increase, the prices of the product would decrease.

e. As the firms can quickly and easily change production, the competition will increase and firms will shift towards producing goods with more profits and this will reduce price level in the markets.

f. As restrictions in the market increases, the number of firms in the industry will decrease. This decrease in the number of firms will reduce supply of the good making industry less competitive and leading to increase in price level.