Oligopoly Market Structure Quiz

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Questions and Answers

What defines the interdependence characteristic in an oligopoly?

All firms offer unique products that do not compete with each other.

The actions of one firm significantly affect others in the market. (correct)

Firms in oligopoly primarily compete on price alone.

Firms act independently from one another.

Which of the following is a characteristic specifically observed in an oligopolistic market?

Few dominant firms with considerable pricing influence (correct)

Complete control over market prices by one firm

High levels of product differentiation

Unlimited number of sellers

What is an example of an industry that commonly exhibits oligopolistic characteristics?

Technology start-ups

The oil industry (correct)

Agricultural products

Fast food restaurants

In a pure oligopoly, how are the products offered by firms characterized?

Similar in all aspects Signup and view all the answers

Which of the following is a common strategy employed by firms in an oligopoly to enhance customer loyalty?

Frequent advertising and promotional incentives Signup and view all the answers

What barrier do firms face when entering an oligopolistic market?

High competition with established firms Signup and view all the answers

Which of the following statements about differentiated oligopoly is true?

Products offered are not homogeneous. Signup and view all the answers

What is the primary focus of competition in an oligopoly?

Intense rivalry in pricing and marketing strategies Signup and view all the answers

What characterizes a kinked demand curve in an oligopoly?

It shows different elasticities for higher and lower prices. Signup and view all the answers

What happens when a firm in an oligopoly increases its prices?

It typically results in a decrease in overall revenue. Signup and view all the answers

What is the result of a firm in an oligopoly decreasing its price?

It typically leads to inter-firm price wars. Signup and view all the answers

In the context of a kinked demand curve, what occurs during a price war?

All firms decrease their prices and demand turns inelastic. Signup and view all the answers

What best describes the consumer behavior in the gasoline station example under oligopoly conditions?

Consumers show weak brand loyalty. Signup and view all the answers

What does collusion in an industry typically aim to achieve?

Higher prices and potentially reduced output. Signup and view all the answers

How does a firm losing market share affect decision-making in an oligopolistic market?

Firms may consider engaging in collusion to stabilize prices. Signup and view all the answers

What occurs if one firm in an oligopoly successfully reduces its price?

Competitors may also reduce their prices in response. Signup and view all the answers

What is one of the main incentives for oligopolistic firms to engage in collusion?

To reduce the amount of competition among themselves Signup and view all the answers

Which characteristic is essential for a successful cartel?

Definitive and enforceable agreements Signup and view all the answers

In which situation does imperfect collusion typically occur?

When there is failure to meet perfect collusion characteristics Signup and view all the answers

How does a centralized cartel maximize industry profits?

By surrendering decision-making power to a central association Signup and view all the answers

What is a common issue that leads to the breakdown of a collusive agreement?

A single firm’s profit incentive to act independently Signup and view all the answers

Which of the following is NOT a characteristic of imperfect collusion?

Consistent and clear agreements Signup and view all the answers

What role does a cartel play in a collusive arrangement?

To formalize agreements for price and output controls Signup and view all the answers

What does collusion among firms typically aim to accomplish in an industry?

Block new entrants to the market Signup and view all the answers

Study Notes

Oligopoly Market Structure

Oligopoly is a market structure between pure competition and monopoly
Characterized by a small number of firms with high interdependence
Oligopolists' economic policies are in relation to competitors' policies
Changes in one company's pricing or marketing strategy can affect others' sales and profits
The oil industry (6-8 companies) is an example of oligopoly in the country
Companies often charge uniform pricing
Advertising, promotions, discounts, and free services used to increase sales and customer loyalty

Characteristics of Oligopoly

Few Sellers: A few large firms dominate the market, controlling prices
Interdependence: Firms' actions significantly impact each other's profits
Advertising: Firms heavily advertise to reach more customers and increase profits
Competition: Intense competition exists due to the limited number of sellers
Entry and Exit Barriers: High barriers to entry (difficult to enter the market) and some barriers to exit

Classification of Oligopoly

Pure Oligopoly: Products are similar (e.g., cement, oil). High interdependence among firms
Differentiated Oligopoly: Products are not identical (e.g., cars, appliances), but firms still have some interdependence

Kinked Demand Curve

Demand curve is not a straight line, with different elasticities at different price points
Prices are relatively stable; firms are hesitant to change prices due to possible competitor responses
When one firm increases prices, competitors usually do not follow—creating price inelasticity for higher prices
When one firm decreases prices, competitors often match the reduction—creating price elasticity for lower prices

Collusion

Collusion: a secret agreement among companies to control prices or output
Perfect Collusion: A formal agreement (cartel) among all firms to set prices and output levels to maximize joint profits
Imperfect Collusion: Informal or incomplete agreements among firms. There might be failures regarding the characteristics of perfect collusion (e.g., not all firms join, or agreement isn't clearly defined)
Centralized Cartel: A complete type of collusion where individual firms surrender pricing and output decisions to a central organization responsible for profit maximization.

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Description

Test your knowledge on the oligopoly market structure, which sits between pure competition and monopoly. Explore key characteristics, examples, and the significance of interdependence among firms in this market type. Understand how pricing, advertising, and competition work in an oligopoly setting.