Question

Explain the implications of the following in an oligopoly market :
a) Inter-dependence between firms
b) Non-price competition

Answer 1

(i)Inter-dependence between firms: Under oligopolistic market form, there exists few but large and dominating firms. These firms account for majority of market supply, thereby control the market price and quantity of the output. There exists a very high degree of mutual interdependence between the firms in an oligopoly market. The price and the quality decisions of a particular firm are dependent on the price and the quality decisions of the rival (other) firms. This feature has an important implication that no firm can fix Its price and output decisions without considering the probable reactions of other firms.

(ii) Non price competition: Under oligopolistic market form, prices do not move freely as per the changes in demand. This is due to the counter decisions of the rival firms. Therefore, we can say that oligopolistic firms do not compete with each other on the grounds of price. This feature has an important implication that an oligopolistic firms fixes its price and output decisions after taking into consideration the probable rival reactions.