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Question

Why are the firms said to be interdependent in an oligopoly market? Explain. 


Solution

In an oligopoly market, there is a small number of big firms. Accordingly, there is a high degree of mutual interdependence, implying that price and output policy of one firm has a significant impact on the price and output policy of the rival firms in the market. When one firm lowers its price, the rival firms may also lower the price. And, when one firm raises the price, the rival firms may not do so. It is because of this interdependence that it becomes very difficult to estimate change in firm's sales caused by a change in price which implies that a precise relationship between price and quantity cannot be established. Hence the firm's demand curve cannot be drawn.

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