Which of the following statements about oligopolies is not correct?
a. Unlike monopolies and monopolistically competitive markets, oligopolies prices do not exceed their marginal revenues.
b. Oligopolistic firms are interdependent in a way that competitive firms 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:
Correct Answer: a. Unlike monopolies and monopolistically competitive markets, oligopolies’ prices do not exceed their marginal revenues.
Explanation:
Oligopolies are markets dominated by a small number of large firms, and these firms have significant control over pricing and output decisions. The given statement (option a) is incorrect because in an oligopoly, firms typically set prices above their marginal revenues, much like monopolies. This occurs because oligopolistic firms face a downward-sloping demand curve, meaning that lowering the price to sell additional units reduces the revenue earned from previous sales. This results in a marginal revenue that is lower than the price, similar to monopolies.
Characteristics of Oligopolies:
- Interdependence Among Firms:
- Unlike firms in a perfectly competitive market, which act independently, oligopolistic firms must consider the actions and reactions of their competitors when making pricing and output decisions. If one firm lowers prices, others may follow to avoid losing customers, leading to price wars.
- Few Sellers:
- Oligopolies consist of a small number of large firms, each of which holds a significant share of the market. This small number of participants makes strategic decision-making crucial.
- Impact of One Firm on Others:
- The decisions made by one firm in an oligopoly directly affect the others. If one firm changes prices or introduces a new product, competitors must react accordingly, demonstrating the high level of mutual dependence in such markets.
In contrast, competitive firms do not influence each other, and monopolistically competitive firms have some pricing power but still face many competitors. Thus, option a is incorrect because oligopolists do set prices above marginal revenue.
Here is an illustration representing an oligopoly market, showing large companies competing with strategic interactions, price wars, and market analysis visuals in the background. Let me know if you need any modifications!
