Question

Which statement about oligopolies is false? (LO3) a) They operate at the minimum points of their ATC curves. b) They charge higher prices than perfect competitors. c) They make profits in the long run. d) They cannot legally form cartels in the United States.

Short answer

All of the given statements about oligopolies are correct. The exercise appears to contain an error, as the false statement about oligopolies is not presented.

Step-by-step solution

Statement A

Oligopolies operate at the minimum points of their Average Total Cost (ATC) curves. This statement is correct as oligopolies, just like other market structures, would ideally want to minimize their costs to stay competitive in the market.

Statement B

Oligopolies charge higher prices than perfect competitors. This statement is also correct. Oligopolies have more market power and face less competition, which allows them to charge higher prices compared to firms in perfect competition, where there are many firms and they are price takers.

Statement C

Oligopolies make profits in the long run. This statement is correct. Due to the significant market power, barriers to entry, and the ability to maintain higher prices, oligopolies can maintain their profits in the long run.

Statement D

Oligopolies cannot legally form cartels in the United States. This statement is correct. Cartels are an illegal practice that involves collusion between market players to set prices or manipulate supply levels. In the United States, forming a cartel is illegal under antitrust laws, such as the Sherman Antitrust Act. As all of the given statements about oligopolies are correct, the exercise appears to contain an error. The false statement concerning oligopolies is not presented.

Key concepts

Market Structures

Market structures refer to how different industries are organized based on the number of firms operating within them and how they compete. Oligopoly is one such market structure characterized by having a small number of large firms dominating the market. These firms have significant control over prices, unlike perfect competition where many small firms produce similar goods and are price takers. With few competitors in an oligopoly, each firm's decisions can impact the market and the other firms within it, leading to strategic interactions where firms must consider others' potential responses when making pricing or output decisions.
A classic example of oligopoly includes industries like airlines, automobiles, and telecommunications, where a few key players hold the majority of market share. These industries face high barriers to entry, including substantial capital requirements and technological know-how.
Understanding market structures helps in analyzing how firms behave and set prices, which ultimately affects consumers and overall economic welfare.

Average Total Cost (ATC)

Average Total Cost (ATC) is a key concept in economics that helps firms determine and manage their financial performance. ATC is calculated by dividing the total cost of production by the number of units produced. Mathematically, it can be expressed as:
\[ATC = \frac{TC}{Q}\]
where \(TC\) is the total cost and \(Q\) is the quantity produced. For firms, the goal is to produce at the lowest possible average total cost to remain competitive.
Oligopolies are often able to operate near the minimum point of their ATC curve due to economies of scale, a situation where costs per unit decrease as output increases. This advantage arises from spreading fixed costs across a larger number of units and utilizing efficient production techniques. By minimizing ATC, firms can maximize profits and gain a competitive edge in their respective markets.

Antitrust Laws

Antitrust laws are regulations put in place to promote fair competition and prevent monopolies and other forms of anti-competitive practices. These laws are vital in maintaining the health of a market economy, ensuring that consumers have access to goods and services at fair prices.
In the United States, one of the key pieces of legislation is the Sherman Antitrust Act, which prohibits practices like forming cartels or collusive price-setting among oligopoly firms. Cartels, which involve coordinated efforts among firms to manipulate markets by setting prices or controlling production, are illegal as they undermine competitive markets.
These laws not only prevent the formation of cartels but also impose severe penalties, including fines and imprisonment, for violating them. By enforcing antitrust laws, authorities aim to preserve competition, reduce market exploitation, and foster innovation. Understanding these laws is essential for businesses to operate within legal limits while engaging in competitive markets.