Chapter 21: Problem 763

In dealing with price-setting, there is one important difference between the oligopolist's considerations and those of the monopolist. What is it?

Short Answer

Expert verified

The major difference between a monopolist's and an oligopolist's considerations when setting prices lies in the presence of competition. A monopolist does not have to worry about competitors' reactions when setting prices, as they have complete control over the market and face no direct rivals. On the other hand, an oligopolist must consider the potential responses of their competitors, as any decision they make can trigger a reaction from other firms in the market, affecting their profits and market share.

Step by step solution

Definition of Monopoly and Oligopoly

A monopoly is a market structure where there is only one seller for a given product or service, offering no close substitutes, and with high barriers to entry. In contrast, an oligopoly consists of a small number of large firms that dominate a particular market, selling similar or differentiated products, and also having significant barriers to entry.

Monopolist's Price-setting Considerations

A monopolist faces no competition in the market and can set the price for their product or service. The monopolist determines the price by considering the demand curve and marginal cost of production. The monopolist's objective is to maximize their profit by producing the optimal quantity of the product where marginal revenue equals marginal cost.

Oligopolists's Price-setting Considerations

Unlike a monopolist, an oligopolist operates in a market with a few major competitors. When setting prices, an oligopolist needs to consider the possible reactions of competitors; this is known as strategic interdependence. Oligopolists often implement strategies such as collusion (tacit or explicit) to limit price competition and maximize joint profits. They also engage in strategic behaviors such as price discrimination, price wars, or product differentiation to establish dominance or gain market share.