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Chapter 10: Q.11 (page 252)

Will the firms in an oligopoly act more like a

monopoly or more like competitors? Briefly explain.

Short Answer

Expert verified

Oligopoly will behave like both the monopoly and competitor.

Step by step solution

01

Step 1. Oligopoly.

A market with a small number of sellers such that each seller has a significant market share and the decision of one seller affects the others, is referred to as an oligopoly firm.

02

Step 2. Explanation

A firm in an oligopoly will behave like a competitor as they try to grab market share from each other, to increase their market supremacy. But, if these firms join hands, they will be able to act as a a monopoly and determine price and quantity in the market.

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Most popular questions from this chapter

Consider the curve in the figure below, which shows the market demand, marginal cost, and marginal revenue curve for firms in an oligopolistic industry. In this example, we assume firms have zero fixed costs.

a. Suppose the firms collude to form a cartel. What price will the cartel charge? What quantity will the cartel

supply? How much profit will the cartel earn?

b. Suppose now that the cartel breaks up and the oligopolistic firms compete as vigorously as possible by cutting the price and increasing sales. What will be the industry quantity and price? What will be the collective profits of all firms in the industry?

c. Compare the equilibrium price, quantity, and profit for the cartel and cutthroat competition outcomes.

Suppose that, due to a successful advertising campaign, a monopolistic competitor experiences an increase in demand for its product. How will that affect the price it charges and the quantity it supplies?

Continuing with the scenario in question 1, in the long run, the positive economic profits that the monopolistic

competitor earns will attract a response either from existing firms in the industry or firms outside. As those firms capture the original firm’s profit, what will happen to the original firm’s profit-maximizing price and output levels?

When OPEC raised the price of oil dramatically in the mid-1970s, experts said it was unlikely that the cartel could stay together over the long term—that the incentives for individual members to cheat would become too strong. More than forty years later, OPEC still exists. Why do you think OPEC has been able to beat the odds and continue to collude? Hint: You may wish to consider non-economic reasons.

Would you expect the kinked demand curve to be more extreme (like a right angle) or less extreme (like a normal demand curve) if each firm in the cartel produces a near-identical product like OPEC and petroleum? What if each firm produces a somewhat different products? Explain your reasoning.
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