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OLIGOPOLY – ESSAY QUESTIONS a) EXPLAIN HOW OLIGOPOLISTS ARE AFFECTED BY THE INTERDEPENDANCE OF FIRMS IN THE MARKET; An oligopolistic market structure is one which comprises of a few sellers. These firms are relatively equal in size and there is no one dominant monopoly firm. These firms will compete by measures such as product differentiation, brand loyalty and after-sales services etc… Since these firms are directly competing, it is important for each one to consider what the outcome of their actions will be; i.e. how the other firms will react to the change. For this reason it is said that there is a high degree of interdependence between the firms in an oligopolistic market and this is seen most clearly in the decisions a firm makes in price and output levels. There are two main classifications of this type of market structure. These are; collusive and non-collusive oligopoly and both are subject to the interdependence seen in the market. Because all decisions must be taken with regard to a rival firm’s reaction, it is impossible to predict with total certainty what the effects of a price and output change would be. This means that there is no one model that would describe completely the way an oligopolist might think, like the equilibrium diagrams for price and output do for monopolies and perfectly competitive markets. A diagram to help analyse the workings of an oligopolistic market must take into account that decisions will be based on predictions. This is exactly what the Kinked Demand Curve Diagram does. This diagram is used to illustrate what a firm must consider before changing prices. It applies to the non-collusive oligopoly where price competition will be in effect. It basically states that any change in price from the established equilibrium would result in lower profits.
Approximate Word count = 1152
Approximate Pages = 4.6
(250 words per page double spaced)
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