Question

Assume there are currently five firms producing and selling fertilizer in the Asian market. Also assume that the product is differentiated and barriers to entry are high in the industry, making this market an oligopoly.

If two firms were to enter the market, economists expect the equilibrium price will likely _______ and the equilibrium quantity will likely _______

Answer 1

Equilibrium Price FALLS and Equilibrium quantity RISES

Step-by-step explanation:

In an oligopoly generally, as more and more members enter into the industry, this signifies that supply will be increasing as there are now more sellers. The resultant effect clearly will be a price drop but not so clear is what happens to demand. It should be recalled however that a downward movement on the price (y) axis, will result in a forward shift in the quantity demanded (x) axis, implying a rise in quantity demanded as a response to the fall in price.

Another way to understand what happens in an oligopoly when more players enter the industry is to know that the equilibrium price of an oligopoly is a mid-point between that of the Monopoly (which is a higher price for a lesser quantity) and that of the Perfect Competition (lower price for higher quantity). So, as more players enter into an oligopoly; it pushes the equilibrium price of that oligopoly toward that of a perfect competition.

Answer 2

Price will likely be lowered and quantity supplied increased.

Step-by-step explanation:

This is the case of exercising barriers to entry. Predatory pricing or limit pricing can be an effective strategic move here by the existing 5 companies.

In the strategies mentioned above, firms deliberately lower their prices even if it means a loss in the short run to force out any new entrants. Since the prices may be set lower than average total costs, it is extremely difficult for new entrants to make any profits and thus they might be forced out. This is also accompanied by an increased supply of fertilizers that helps these 5 companies exercise price control by influencing supply in the market. The equilibrium quantity thus increases in the market.

Hope that helps.