Chapter 21: Problem 758

Suppose we are told that an industry is composed of a small number of firms. Can we immediately call this industry oligopolistic? Explain.

Short Answer

Expert verified

No, we cannot immediately call an industry with a small number of firms oligopolistic. While this scenario may suggest an oligopoly, we need more information on market dominance, barriers to entry, interdependence, non-price competition, price rigidity, and product differentiation to determine if it is indeed an oligopoly.

Step by step solution

Define Oligopoly

Oligopoly is a market structure in which a small number of large firms dominate the market, producing similar or slightly differentiated products. These firms have significant control over the market price and are interdependent, meaning that the actions of one firm directly affect the other firms in the industry.

Characteristics of Oligopoly

Some common characteristics of an oligopoly include: 1. Market dominance by a few large firms 2. High barriers to entry 3. Interdependence among firms 4. Non-price competition 5. Price rigidity 6. Similar or slightly differentiated products

Analyze the Given Scenario

In the given scenario, we only know that the industry is composed of a small number of firms. However, this information alone is not sufficient to call the industry oligopolistic.

Conclusion

While an industry with a small number of firms may be suggestive of an oligopolistic market structure, we cannot immediately call it an oligopoly without further information. We need to analyze other factors and characteristics, such as market dominance, barriers to entry, interdependence, non-price competition, price rigidity, and product differentiation, before determining if it is indeed an oligopoly.

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