Q. 125.0( 1 Vote )

a) What is meant

Answer :

Oligopoly is the market structure with only a few sellers of a commodity. The market would be dominated by only a few sellers that are very big firms. Since there are only a few rival firms, firms recognise their mutual dependence. The action of each firm would have corresponded with the reaction from other firms. This results in price rigidity in oligopoly. Under this, the firms reduce their price corresponding to a price reduction by a firm but do not follow a price rise by the other firms. Thus the firms will not have a tendency to change the existing price.


Mostly the firms indulge in non-price competition. It is mainly carried out through sales promotion, advertisement, after sale services and other factors. The competition through non-price factors will result in price rigidity in the market. The firms will compete through all the factors other than price.


b)


Oligopoly is the market structure with only a few sellers of a commodity. The market would be dominated by only a few sellers that are very big firms. Since there are only a few rival firms, firms recognise their mutual dependence. The action of each firm would have corresponded with the reaction from other firms. This results in price rigidity in oligopoly. Under this, the firms reduce their price corresponding to a price reduction by a firm but do not follow a price rise by the other firms. Thus the firms will not have a tendency to change the existing price. This results in the formation of a kink in the demand curve.


In an oligopoly, the firms are reluctant to change their prices even if the cost or demand conditions change. The firms will not lower their prices even if the cost or demand declines as the other firms will match this price decrease and reduce their price. Thus the firms will not be able to increase their sales. Conversely, the firms will not raise their prices if the cost or demand rises as no firm will respond to this by raising their prices. Thus, firms will lose their market share. This will create a kink in the demand curve.


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