Mutual interdependence means that each oligopolistic firm:
a. faces a perfectly elastic demand for its product.
b. must consider the reactions of its rivals when it determines its price policy.
c. produces a product identical to those of its rivals.
d. produces a product similar but not identical to the products of its rivals.
The correct answer and explanation is :
The correct answer is b. must consider the reactions of its rivals when it determines its price policy.
Explanation:
Mutual interdependence refers to the situation in an oligopolistic market where the actions of one firm directly affect the decisions of other firms in the market. Oligopolistic markets are characterized by a small number of firms, and these firms are highly aware of each other’s behavior. As a result, each firm must take into account how its rivals will respond when making decisions related to pricing, output, and marketing strategies. This is in contrast to perfectly competitive markets, where firms are price takers and do not need to worry about rivals’ actions.
The concept of mutual interdependence is critical in understanding the dynamics of oligopoly because of the strategic decision-making involved. When one firm changes its price or quantity, the other firms in the market are likely to react. For example, if a firm lowers its price, other firms might follow suit to avoid losing customers, or they might choose to maintain their price, hoping to capture the increased demand. This interdependence often leads to outcomes such as price rigidity, where firms avoid making significant price changes to prevent retaliatory actions by competitors.
Why the Other Options Are Incorrect:
- a. faces a perfectly elastic demand for its product: This is a characteristic of a perfectly competitive market, not an oligopoly. In oligopoly, firms face a more inelastic demand curve due to the few competitors and the strategic behavior involved.
- c. produces a product identical to those of its rivals: While some oligopolies involve firms producing identical products (e.g., in industries like oil), many oligopolies involve differentiated products. Firms may produce similar but not identical products, differentiating themselves through branding, quality, or other features.
- d. produces a product similar but not identical to the products of its rivals: While this may apply to some oligopolies, mutual interdependence specifically refers to the strategic consideration of rivals’ reactions to decisions, not necessarily the similarity or differentiation of the products.
In summary, mutual interdependence emphasizes the strategic interaction among firms in an oligopoly, where each firm’s actions are influenced by the anticipated responses of its competitors.