Final answer:
Product differentiation in oligopolies leads to reduced price uniformity, creating a market where prices may deviate from marginal costs and barriers to entry are high due to branding and marketing efforts. This complex interdependence and competition among a few large firms make it difficult to study oligopolistic markets.
Step-by-step explanation:
Product differentiation complicates the study of oligopolies because it can lead to a situation where markets may not obey the law of one price. In an oligopoly, a small number of large firms dominate the market and may compete fiercely or collude to influence prices and profits. Product differentiation, often through intense marketing and brand recognition efforts, can create barriers to entry and contribute to the persistence of oligopolies. For instance, firms becoming recognized brands, like Coca-Cola or Pepsi, involves significant marketing expenditure which cannot be easily matched by newer competitors. This market dynamic results in mutual interdependence among oligopolistic firms where decisions on output, price, and other strategic elements are closely connected to the moves of competitors.
Moreover, oligopolistic firms do not always produce at the lowest point on their average cost curves, nor are prices always equal to marginal cost, adding further complexity to the analysis of such markets. The challenges in competing against established firms with strong differentiation can prevent new entrants, thereby limiting competition and maintaining high-profit levels for the existing firms.