Price and Output under Oligopoly
Unlike monopolists and pure competitors, an oligopolist cannot determine price and quantity by simply estimating market demand and costs. It must also take into account how its rivals will react to changes in its own price and quantity. This makes precise predictions about price and quantity in oligopoly markets difficult. We can, however, derive a range of possible prices and quantities for the oligopoly markets.
- If the oligopolists collude, acting as a single firm, then we would expect the monopoly price and quantity in the market. There is always an incentive to collude since industry profits will be higher when firms collude.
- If the oligopolists compete, then we would expect P=ATC (which is the competitive solution).
- Depending on how the rival oligopolists react to one another's price and output decision(s), the oligopoly price is likely to fall somewhere between these two extremes.
- Obstacles to collusion
- Collusion is usually illegal
- The more firms in the industry, the more difficult it will be to maintain the collusive agreement.
- The relative ease of detecting cheating will affect the ability to successfully collude.
- Low entry barriers
- Rapidly changing market conditions
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This page was last modified Wednesday, March 19, 1997.