Which of the following statements about oligopolies is not correct?
a. Oligopolistic firms always charge the monopoly price.
b. Oligopolistic firms are interdependent in a way that firms in perfect competition are not.
c. An oligopolistic market has only a few sellers.
d. The actions of any one seller can have a large impact on the profits of all other sellers.
The correct answer and explanation is :
The correct answer is:
a. Oligopolistic firms always charge the monopoly price.
Explanation:
Oligopoly is a market structure characterized by a few large firms that dominate the industry and are interdependent in decision-making. This means that each firm’s pricing and output decisions impact other firms in the market.
The incorrect statement is option (a) because oligopolistic firms do not always charge the monopoly price. The monopoly price is the price that a single seller would set if it had complete control over the market and aimed to maximize profit by restricting output. However, in an oligopoly:
- Firms Face Competition – Even though there are few firms, they compete with one another, which often prevents them from charging the monopoly price. Unlike a monopoly, where a single firm dictates prices, oligopolists must consider rivals’ reactions to pricing strategies.
- Price Rigidity – Oligopolistic firms tend to avoid price wars and instead keep prices stable. They might use strategies like price matching, collusion (illegal in many countries), or tacit agreements to maintain market equilibrium rather than charging monopoly prices.
- Game Theory and Strategic Behavior – Oligopolies are best analyzed using game theory, which shows that firms often cooperate or compete strategically rather than charging monopoly prices. For example, if firms collude (explicitly or implicitly), they may set prices higher, but if they compete, they may set lower prices to attract customers.
Why the Other Statements Are Correct:
- (b) Oligopolistic firms are interdependent – Each firm must consider competitors’ actions when making decisions.
- (c) An oligopolistic market has only a few sellers – By definition, an oligopoly consists of a small number of large firms.
- (d) One firm’s actions impact others – Price cuts, advertising, or product launches by one firm can significantly affect competitors’ sales and profits.
Thus, option (a) is incorrect because oligopolists do not always charge monopoly prices.