Which of the following is a key feature of an oligopoly?
A Many firms, all selling identical products with no control over price.
B A single firm that is the sole producer of a unique product.
C A few firms dominate the market, and each firm’s actions can affect the others.
D Firms freely enter and exit the market without any restrictions.
The correct answer and explanation is:
The correct answer is C: A few firms dominate the market, and each firm’s actions can affect the others.
An oligopoly is a market structure characterized by a small number of firms that have significant market power. Unlike perfect competition, where many firms produce identical products and have no control over price, oligopolies consist of a few firms that dominate the market, often offering similar or differentiated products. This limited number of firms means that each firm’s decisions—such as pricing, production levels, and marketing strategies—can influence the other firms in the industry. This interdependence creates strategic behavior where firms must consider the potential reactions of competitors when making decisions.
In an oligopoly, there is often a high level of market concentration, meaning the top firms control a large share of the market. While they may not be able to fully control the price (as a monopoly would), they have enough market power to influence it. Additionally, barriers to entry tend to be high, preventing new firms from easily entering the market and increasing competition. These barriers can include high capital requirements, economies of scale, and brand loyalty, all of which protect the dominant firms from losing market share.
A key feature of oligopolistic competition is collusion or tacit agreements among firms to fix prices or reduce competition, which can harm consumers by keeping prices higher than in more competitive markets. This collusion can be explicit, where firms agree on pricing or market share, or implicit, where firms silently adjust their strategies to avoid direct competition.
In summary, an oligopoly is defined by a small number of firms whose actions influence each other, creating an environment where strategic behavior is crucial, and the firms have considerable control over the market.