The term oligopoly indicates:
a. a one-firm industry.
b. many producers of a differentiated product.
c. a few firms producing either a differentiated or a homogeneous product.
d. an industry whose four-firm concentration ratio is low.
The correct answer and explanation is :
The correct answer is c. a few firms producing either a differentiated or a homogeneous product.
Explanation:
An oligopoly is a market structure characterized by a small number of firms that dominate the industry. This can include either differentiated products, where firms offer products that are similar but slightly different, or homogeneous products, where the products are nearly identical. The key feature of an oligopoly is that the firms within the industry have a significant market share, and their actions (such as setting prices, quantities, or marketing strategies) are interdependent. This means that each firm’s decision can affect the others, leading to strategic behavior like collusion, price wars, or other competitive tactics.
Key Features of an Oligopoly:
- Few Firms: Unlike in perfect competition (many firms) or monopoly (one firm), oligopolies are made up of just a few firms. These firms control a large portion of the market share, so the decisions of one firm can significantly impact others.
- Interdependence: Firms in an oligopoly are interdependent, meaning that they must consider the potential reactions of their competitors when making decisions about pricing, product offerings, or market expansion. If one firm lowers its prices, for example, others might follow suit, leading to a price war.
- Barriers to Entry: Oligopolistic markets typically have high barriers to entry, such as significant capital requirements, economies of scale, or control over key resources. These barriers prevent new firms from entering the market easily, thus maintaining the dominance of the few established firms.
- Product Differentiation: While oligopolies can have homogeneous products (like in the case of industries like steel or oil), they can also feature differentiated products, such as in the automotive or smartphone industries, where firms like Toyota, Ford, and Apple offer products with unique features.
- Market Power: Firms in an oligopoly have some degree of market power, allowing them to set prices above the competitive level. However, their market power is limited by the competitive actions of other firms.
Thus, c is the correct answer, as it most accurately describes the nature of an oligopoly.