Answer to Question #71389 in Microeconomics for Wanatsha

Question

In an oligopoli-stic market situation there is often said to be an absence of price competition. Explain
why this is so and critically review the alternatives which are often pursued by firms in this
situation.

Answer 1

In an oligopolistic market, a few companies that occupy much of the market set the price level for the goods they need to increase their profits, in contrast to perfect competition. An alternative to one or more firms is to use price growth by reducing the price and outflow of business from the company with the highest price. If this happens, firms can equalize in a different way: most can save low prices, trying to squeeze out the firm with the highest price outside the market; the majority can raise prices, allocate a "fraud" to the firm and put it under financial strain; or they can every attempt to cut the rest by setting a price war that could harm them all.