What is the effect of an oligopoly on price?
The economic and legal concern is that an oligopoly can block new entrants, slow innovation, and increase prices, all of which harm consumers. Firms in an oligopoly set prices, whether collectively—in a cartel—or under the leadership of one firm, rather than taking prices from the market.
How are price and output decisions taken by cartels in an oligopoly market?
In a cartel type of collusive oligopoly, firms jointly fix a price and output policy through agreements. But under price leadership one firm sets the price and others follow it. The one which sets the price is a price leader and the others who follow it are its followers.
How the size of an oligopoly affects the market outcome?
The larger the number of sellers, the less concerned each seller is about its own impact on the market price. That is, as the oligopoly grows in size, the magnitude of the price effect falls. When the oligopoly grows very large, the price effect disappears altogether, leaving only the output effect.
What is the output of an oligopoly?
Therefore, the price and output are indeterminate under oligopoly. In other market structures, such as perfect competition and monopoly, price and output are determined by taking into account demand, supply, revenue, and cost factors.
How is output determined in oligopoly?
1. Price Determination in Non-Collusive Oligopoly: In this case, each firm follows an independent price and output policy on the basis of its judgment about the reactions of his rivals. If the firms are producing homogeneous products, price war may occur.
How oligopoly firms are interdependent in taking price and output decisions?
In an oligopoly, firms are interdependent because each firm takes into consideration the likely reactions of its rival firms when deciding its output and price policy. It makes a firm dependent on other firms. The firm may have to reconsider the change in the light of the likely reactions.
What is oligopoly explain the price output determination process under price leadership in oligopoly?
An oligopoly exists between two extreme market structures, perfect competition, and monopoly. When a few firms dominate the market for a good or service is called oligopoly.
What is price rigidity in oligopoly?
Firms under oligopoly are in a position to influence prices. However, they try to avoid price competition for fear of a price war. They follow the policy of price rigidity. Price rigidity refers to a situation in which the price remains constant despite changes in demand and supply conditions.
Why are prices stable in oligopoly?
The model of the kinked demand curve suggests prices will be stable. Firms don’t want to increase prices because they will see a sharp fall in demand. Firms don’t want to cut prices because they will start a price war, where they don’t gain market share, but do get lower prices and lower revenue.
How price and output is determined?
The market price and output is determined on the basis of consumer demand and market supply under perfect competition. In other words, the firms and industry should be in equilibrium at a price level in which quantity demand is equal to the quantity supplied.
What is price determination in oligopoly?
Price Determination under Oligopoly. Oligopoly is that market situation in which the number of firms is small but each firm in the industry takes into consideration the reaction of the rival firms in the formulation of price policy. The number of firms in the industry may be two or more than two but not more than 20.