Question

Which statement is true? (LO1) a) All oligopolies have only a few firms. b) Most oligopolies have only a few firms. c) Some oligopolies have only a few firms.

Short answer

The correct statement is (b) - "Most oligopolies have only a few firms", as it accurately describes the characteristics of an oligopoly with a small number of large firms dominating the market.

Step-by-step solution

Understanding the definition of an oligopoly

Oligopoly is a market structure characterized by a small number of large firms that dominate the market. These firms hold a significant market share, and their actions can significantly influence the market price and output levels.

Analyzing each statement

We will evaluate the truth of each statement in terms of the characteristics of an oligopoly. a) All oligopolies have only a few firms. While it is true that oligopolies have a small number of large firms dominating the market, it is important to note that the term "few" would not necessarily apply to all oligopolies. The number of dominating firms can vary depending on the industry. b) Most oligopolies have only a few firms. This statement accurately describes an oligopoly since most oligopolies do have a small number of large firms controlling the market. Their decisions and competitive behavior can significantly influence the market environment. c) Some oligopolies have only a few firms. While this statement is also based on the characteristics of an oligopoly, it is not as accurate as statement (b) because it implies that not every oligopoly has a small number of dominant firms, which contradicts the definition of an oligopoly.

Choosing the correct statement

After analyzing each statement, we can conclude that statement (b) - "Most oligopolies have only a few firms" is the most accurate description of an oligopoly, as it acknowledges the core feature of an oligopoly being the presence of a small number of dominating firms.

Key concepts

Market Structure

In the world of economics, the term "market structure" describes how different industries are organized in terms of competition. It refers to the characteristics and organization of a market, including the number of firms, the nature of competition, and the extent of product differentiation. Understanding market structure is essential to analyze how market forces operate within an industry.

There are several types of market structures, but the most common ones include:

• Perfect Competition: Many firms, identical products, and easy market entry.
• Monopolistic Competition: Many firms, differentiated products.
• Oligopoly: Few firms dominate the market.
• Monopoly: Single firm controls the market.

Oligopoly is particularly interesting because it falls somewhere between monopolistic competition and monopoly. It involves few firms that are large enough to have a significant impact on market outcomes. These firms often engage in strategic planning to make decisions considering the potential reactions of competitors. This creates a unique competitive environment compared to other market structures.

Dominant Firms

Dominant firms play a critical role in an oligopoly. In this market structure, these firms wield considerable power over market conditions. Dominant firms are typically large, and they have the ability to influence various aspects of the market, such as prices and production levels.

Features of dominant firms in an oligopoly include:

• Price Leadership: Often, dominant firms set the price, and smaller firms follow.
• High Barriers to Entry: Significant costs or technological advantages that prevent new competitors.
• Interdependence: Decisions of one firm directly affect others.
• Non-Price Competition: Firms may focus on advertising and product differentiation rather than price changes.

Because few firms have significant control, they must consider the potential reactions from other dominant firms when making strategic decisions. This leads to various competitive behaviors, such as collusion or price fixing, which are sometimes regulated by laws to prevent unfair market practices.

Market Share

Market share is an important concept when discussing oligopolies because it helps to illustrate the control that dominant firms have over the market. Market share refers to the percentage of total sales in an industry generated by a particular firm. In an oligopoly, a few firms typically hold substantial market shares, meaning they dominate the market.

The significance of market share in oligopolies includes:

• Influence on Pricing: Firms with high market share can effectively control prices.
• Bargaining Power: Larger firms can negotiate better conditions with suppliers.
• Risk of Collusion: High market shares can lead to smaller competitive pressures, increasing the risk of unwritten agreements among firms to control market dynamics.

Because of their substantial market share, the actions of these firms have far-reaching consequences. For instance, if a leading firm changes its pricing strategy, it could trigger widespread market shifts, affecting prices and output across the industry. Understanding market share is crucial for analyzing how firms compete within an oligopoly and its effect on consumers.