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Chapter 8: Problem 3

Why are oligopolistic firms price searchers?

Short Answer

Expert verified
Oligopolistic firms are price searchers because, due to their significant market power and the downward sloping demand curve they face, they have the ability to set or 'search' for their own prices to some extent in order to maximize profits. Unlike in a perfectly competitive market, these firms do not take the market price as given.

Step by step solution

01

Define Oligopoly

Start by defining an Oligopoly. It's a market structure characterized by a small number of large firms dominating the market, producing similar or differentiated products. Since there are small number of firms, the actions of one firm likely influences the others.
02

Explain Price Searcher

Then define 'Price Searcher'. In a competitive market, firms are price takers whereas in an oligopoly, firms are price searchers. This means, they search for the price that will maximize their profits as they don't take the market price as given, rather they have some power to determine the price of their product.
03

Connect Oligopoly and Price Searching

Oligopolistic firms are price searchers because they have significant market power and face downward sloping demand curves. This means they have the ability to set their own prices to some extent, unlike in a perfectly competitive market where firms are price takers. By altering the price of their product and assessing the market's response, they are able to 'search' for the price that yields the highest profitable outcome. However, these firms must also take into account the probable reactions of their competitors, which adds another layer to their strategic decision making.

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Most popular questions from this chapter

Define: a. barrier to entry b. natural monopoly c. price searcher d. antitrust law

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