Question

Identify the characteristics of an oligopolistic market. Discuss how these characteristics change the perfectly competitive graphs. Does the process for deciding on the optimal price and quantity change?

Answer 1

Characteristic of oligopolistic market :

a) Industry is dominated by small number of firms , large in size .

b) Firms sell either identical or differentiated products .

c) There are certain barriers to entry .

d) Control over market supply and advertising strategy of marketting .

e) Interdependence among firms and price rigidity

In perfect competition , there is normal profit in long run . The Marginal Revenue curve is the Average Revenue and is horizontal for a firm since Price = Marginal cost , so zero economic profits in long run . This happenns because large number of firms sell homogeneous products .

Oligopoly faces a kinked demand curve . The profit maxizes where MR = MC , possibility of long run profits . If one firm increases the price, other firms won’t follow . Therefore, for a price increase, demand is price elastic. If one firm cuts price, other firms will follow because they don’t want to lose market share. Therefore, for a price cut, demand is price inelastic . Hence we get the kinked demand curve .

A collusive oligopoly is just like a monopoly with super normal profits and price higher than perfect competition .