Question

PART II. Oligopolies (short answers i.e. 2-3 sentences is usually sufficient)

1. Why is there strategic interaction in an oligopoly market but not in a perfect competition or monopoly market?

2. Why is a “medical arms race” in an oligopoly market (such as hospitals in the Washington D.C. area) possible, and why from an economic perspective does this result in inefficient medical services?

3. Why can non-price competition in an oligopoly health care market be beneficial to the consumer?

Answer 1

1) When oligopoly is concerned there are few seller and many buyers, hence we need to have a particular strategy to move ahead in the oligopoly market. Any small change in price done by one single firm, will change the consumer preference for that particular firm as oligopoly operates with heterogeneous and homogeneous products. In perfect competition due to homogeneous product and large sellers and buyers there is no need of strategic interaction. Similarly in a Monopoly, only one seller is manipulating the market.

2) Medical arm race exists because the market in terms of producer of those medicine is small but in terms of buyers and consumers, there is huge demand. Hence there exists an oligopoly market in that particular sector. The main characteristics itself of the oligopoly is the answer to the question, that it is a market with few sellers of large industries. It is inefficient because the services provided is less in number and easy exploitation of the consumers is possible

3) Non-price competition helps the oligopoly market to regulate itself. This was, prices of the medicines in the market will not have drastic fluctuation due to price rivalry between the firms and the consumer will be able to define his/her budgets accordingly. Also, health related products are necessary goods hence the consumer is bound to buy. If firms start increasing price for profit maximization, with fewer options in hand, the consumer is exploited.