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Chapter 10: Q.11 (page 252)

Will the firms in an oligopoly act more like a

monopoly or more like competitors? Briefly explain.

Short Answer

Expert verified

Oligopoly will behave like both the monopoly and competitor.

Step by step solution

01

Step 1. Oligopoly.

A market with a small number of sellers such that each seller has a significant market share and the decision of one seller affects the others, is referred to as an oligopoly firm.

02

Step 2. Explanation

A firm in an oligopoly will behave like a competitor as they try to grab market share from each other, to increase their market supremacy. But, if these firms join hands, they will be able to act as a a monopoly and determine price and quantity in the market.

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Most popular questions from this chapter

Andrea’s Day Spa began to offer a relaxing

aromatherapy treatment. The firm asks you how much to charge to maximize profits. The first two columns in Table 10.5provide the price and quantity for the demand curve for treatments. The third column shows its total costs. For each level of output, calculate total revenue, marginal revenue, average cost, and marginal cost. What is the profit-maximizing level of output for the treatments and how much will the firm earn in profits?

Price Quantity TC
\(25.00 0 \)130
\(24.00 10 \)275
\(23.00 20\)435
\(22.50 30 \)610
\(22.00 40 \)800
\(21.60 50 \)1,005
\(21.20 60 \)1,225

Would you expect the kinked demand curve to be more extreme (like a right angle) or less extreme (like a normal demand curve) if each firm in the cartel produces a near-identical product like OPEC and petroleum? What if each firm produces a somewhat different products? Explain your reasoning.

Sometimes oligopolies in the same industry are very different in size. Suppose we have a duopoly where one firm

(Firm A) is large and the other firm (Firm B) is small, as the prisoner’s dilemma box in Table 10.4 shows.


Firm B colludes with firm AFirm B cheats by selling more output
Firm A colludes with firm B
A gets \(1000,B gets \)100A gets \(800, B gets \)200
Firm A cheats by selling more outputA gets \(1050, B gets\)50A gets \(500, B gets \)20

Assuming that both firms know the payoffs, what is the likely outcome in this case?

Make a case for why monopolistically competitive industries never reach long-run equilibrium.

Continuing with the scenario in question 1, in the long run, the positive economic profits that the monopolistic competitor earns will attract a response either from existing firms in the industry or firms outside. As those firms capture the original firm’s profit, what will happen to the original firm’s profit-maximizing price and output levels?
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