Question

explain why why are firms mutually interdependent in an oligopoly market.?

Answer 1

In an oligopoly market, the prices are rigid and thus there exists high degree of mutual interdependence among the firms. The counter decisions of the rival firms restricts an individual firm to take the price decisions independently. For instance, if a firm wants to increase its price then the rival firms may not follow the suit and the firm may loose all its customers to the rival firms. On the other hand, if it reduces the price others will also reduce the price with the fear of losing the customers and the firm that initiated the price reduction will not benefit. Thus, there does not exists incentives for the firm to either lower the price or increase the price.