Question

Will the firms in an oligopoly act more like a monopoly or more like competitors? Briefly explain.

a. More like a monopoly, as they face no competition
b. More like competitors, as they have no market power
c. More like competitors, as they follow the perfectly competitive model
d. More like a monopoly, as they set prices cooperatively

Answer 1

Firms in an oligopoly may act like a monopoly through collusion to set higher prices and earn higher profits, or they may compete aggressively and act like firms in a perfectly competitive market, leading to reduced prices and profits. The outcome depends on the level of collusion or competition among the oligopolistic firms.

Step-by-step explanation:

The behavior of firms in an oligopoly can resemble either a monopoly or a competitive market, depending on the extent of collusion or competition. If oligopolistic firms engage in collusion, they can reduce output and set higher prices, similar to a monopoly. This is because by coordinating with each other on output and pricing, they have the potential to earn monopoly-like profits. In contrast, if oligopolists compete fiercely, they may behave more like firms in a perfectly competitive market, driving down costs and prices which could result in little to no profits for the firms involved.

Oligopolies are characterized by a small number of large firms, mutual interdependence, and the potential for both competitive and collusive behavior. The decisions of a firm in an oligopoly about pricing and quantity produced are contingent on the actions of the other firms in the market.