Oligopoly is a market structure characterized by:
A) independence in decision making
B) a horizontal demand curve.
C) a small number of interdependent firms.
Di telatively easy entry and exit.
The correct answer and explanation is :
Correct Answer:
C) A small number of interdependent firms.
Explanation:
An oligopoly is a market structure where a small number of firms dominate an industry. These firms are highly interdependent, meaning the actions of one firm significantly impact the others. This interdependence is a key characteristic of oligopoly and differentiates it from other market structures such as perfect competition, monopoly, and monopolistic competition.
Why C is Correct?
- Few Large Firms: In an oligopoly, a small number of firms control most of the market share. Examples include the automobile, airline, and telecommunications industries.
- Interdependence: Since there are only a few dominant firms, each firm must consider how its actions (such as changing prices, launching new products, or altering production levels) will affect competitors and how they will react.
- Barriers to Entry: While not as high as in a monopoly, significant barriers (such as economies of scale, brand loyalty, and government regulations) prevent new firms from easily entering the market.
- Price Rigidity: Firms in an oligopoly are often reluctant to change prices due to potential competitive responses. For instance, if one firm lowers prices, others may follow, leading to a price war.
- Non-Price Competition: Since price wars can be damaging, firms engage in advertising, branding, and product differentiation to gain an advantage.
Why Other Options Are Incorrect
- A) Independence in decision-making → Incorrect. Firms in an oligopoly are interdependent; they consider competitors’ reactions when making decisions.
- B) A horizontal demand curve → Incorrect. This applies to perfect competition, where firms are price takers.
- D) Relatively easy entry and exit → Incorrect. Oligopolies have significant barriers to entry, making it difficult for new firms to enter.
Thus, the best answer is C) A small number of interdependent firms.