Homework Help

Explain why under oligopoly conditions firms might wish to choose pricing and output...

user profile pic

yaga49 | (Level 1) Valedictorian

Posted May 31, 2013 at 1:43 PM via web

dislike 2 like

Explain why under oligopoly conditions firms might wish to choose pricing and output strategies together.   What is this arrangement called?

1 Answer | Add Yours

user profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted May 31, 2013 at 2:07 PM (Answer #1)

dislike 1 like

The underlying reason for this is that there are so few firms in an oligopoly.  Because of this, they will want to cooperate as much as they can.  This is called collusion.  If firms cooperate closely enough and effectively enough, they can be called a cartel.

In an oligopoly, there are very few firms.  This means that each firm has a great deal of market share.  It also means that every firm in the market must react to the actions of the other firms in the market.  If, for example, one firm lowers its prices and they others do not, the other firms will lose a great deal of market share.

This is why firms will want to collude.  If they collude, they can agree on the prices.  If they do this, then they can all have prices that are higher than they would be able to have if they were all actually competing with one another.  This would clearly be in their interests. 

In other words, firms in an oligopoly will want to collude because they will want to be able to keep their prices high so as to make more profit than would otherwise be possible.

Join to answer this question

Join a community of thousands of dedicated teachers and students.

Join eNotes