Question

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

Short answer

Firms in an oligopoly can act more like a monopoly when they choose to collude or cooperate, as they control market price and production together. However, if they decide to compete, their behavior resembles competitive markets, focusing on attracting customers through lower prices and product differentiation.

Step-by-step solution

Defining Monopoly and Competitive Behavior

Monopoly: A monopoly is a market structure in which there is only one firm that produces the entire output for the market. The firm has the power to control the price because there is no competition. The monopolist sets the price and production level to maximize its own profitability. Competitive Behavior: In a competitive market, firms operate in a healthy competitive environment, and each firm tries to offer lower prices and improve the quality of their products to attract more customers. They produce at the level where their marginal cost equals their marginal revenue to maximize their profits. In this case, price equals marginal cost, promoting allocative efficiency.

Oligopoly Market Structure

In an oligopoly, a few large firms dominate the market, and each firm has a significant market share. Because there are more than one firm, they can interact and influence the market price and output. The firms can either decide to compete or cooperate (collude) with each other.

Cooperation / Collusion

Firms in an oligopoly can decide to cooperate or collude to maximize their joint profits. This can result in price fixing, where the oligopolistic firms set the price together and refuse to compete on price. This behavior resembles a monopoly, as the firms together control the market price and output.

Competition

Firms in an oligopoly can also engage in competition. Each firm tries to maximize its own profits, even if that means a reduction in the market share of its rivals. They may invest in product differentiation, advertising, and other strategic moves aimed at increasing their market share. In this case, the oligopoly market resembles competitive markets.

Conclusion

The behavior of firms in an oligopoly can resemble a monopoly or competitive markets depending on whether they choose to collude or compete. When firms cooperate or collude, they act more like a monopoly by controlling market price and production. However, if firms decide to compete, their behavior leans towards competition, as they focus on attracting customers through lower prices and investments in product differentiation.