Question

Will the firms in an oligopoly act more like a monopoly or more like competitors? Briefly explain.

Short answer

In an oligopoly, firm behavior lies between that of a monopoly and competitors, depending on the level of competition and cooperation in the market. If firms engage in collusion, they act more like a monopoly by setting prices and limiting output. However, if they strategically compete against one another, they act more like competitors. As competition and cooperation levels in an oligopoly vary, it is difficult to definitively say whether they act more like a monopoly or more like competitors.

Step-by-step solution

Define an Oligopoly

An oligopoly is a market structure where a small number of large firms dominate the market. These firms often have significant market power and can influence prices, but they must also consider the actions of other firms in the market when making decisions.

Monopoly and Competitive Market Behavior

In a monopoly, there is only one firm dominating the entire market, thus having significant control over price. They maximize profit by producing the quantity at which marginal revenue equals marginal cost and charging a higher price than their production cost. In a competitive market, there are numerous firms offering similar products. Each firm is a price taker, meaning they cannot influence the market price and must accept the price determined by the overall supply and demand. They maximize profit by producing the quantity at which the market price equals their marginal cost.

Oligopoly Behavior

In an oligopoly, firms exhibit both competitive and monopolistic characteristics. When oligopolistic firms compete, each firm's decision influences the others' actions. This interdependence often results in firms strategically making pricing and output decisions, leading to outcomes such as price rigidity or price wars. However, firms in an oligopoly can also engage in collusion, where they agree to act collectively like a monopoly, setting prices and limiting output to maximize joint profits. By doing so, they can exert more control over the market, similar to a monopolistic market structure.

Conclusion

The behavior of firms in an oligopoly can fall between that of a monopoly and competitors, depending on the level of competition and cooperation in the market. If oligopolistic firms engage in collusion, they may act more like a monopoly, whereas if they strategically compete against one another, they act more like competitors. Overall, the level of competition and cooperation in an oligopoly varies, making it difficult to definitively say whether they act more like a monopoly or more like competitors.