Question

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

Answer 1

Oligopoly is an imperfect market structure which is dominated small number of large sellers.

Characteristics-

1. Limited number of producers.

2. Barriers to entry

3. There is a possibility of collusion.

4. Interdependence of firms for decision making.

5. Differentiated products or sometimes identical products also.

6. Large advertising budget.

7. Much non price competition amongst sellers.

Rather than straight demand curve of perfect competition, oligopolist have kinked demand curve which is also the Average revenue curve. Hence Marginal revenue curve is also kinked.

Firms of different economies of scale can coexist in oligopoly unlike perfect competition.

Yes, the process for deciding on the optimal price and quantity change.

Oligopolist sell at the kink. Oligopolist are usually locked in to prices so they compete through non price ways to gain market share. This quantity is lower than that of in perfect competition and the price is higher that what is charged under perfect competition. Profit maximization is at MC=MR. This inefficiency causes deadweight loss. Oligopolist can make extra normal profit.

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