Are Price Wars Likely To Occur In Oligopolistic Markets

1841 WordsMay 9, 20178 Pages
Are price wars likely to occur in oligopolistic markets and how can firms help prevent them? Outline theories and provide examples to illustrate your arguments. DEFINE OLIGOPOLY An oligopoly is a market structure in which a few firms or producers dominate, with each recognizing their interdependence. Under perfect competition or monopolistic competition, there are many firms in the industry. Each firm can ignore the effects of its own actions on rival firms. However, the key to an oligopolistic industry is the need for each firm to consider how its own actions affect the decisions of its relatively few competitors. In an oligopolistic market structure, the consideration of pricing behaviour and actions of one firm to its rival firms is of…show more content…
It is important for firms to understand the choices they make especially if it affects the price at which it and other firms can sell output. One of the fundamental assumptions of oligopoly firms is that, sellers are price makers and that each firm recognises that it is a price maker. The firm also recognises that its actions have a noticeable effect on the prices that other firms can receive for their output. Hence, each firm recognises that it influences the actions of this firms. Sellers behaving strategically is another fundamental assumption of an oligopoly firm. The privacy policy of firms can affect the actions of other firms in the market. With an industry of few producers, oligopoly firm’s conditions to entry may range from completely blocked to perfectly free. The way oligopoly firms and markets are structured, there is no actual freedom of entry or exit and it might all depend on the structure and conditions of the market and its operations. The other fundamental assumption on the demand side behaviour in oligopolistic markets is that, buyers are price takers. Each buyer believes that it has no influence on the market price what so ever, just like in competitive, monopolistic and monopolistically competitive markets (Wyn Morgan, Michael Katz and Harvery Rosen, Ch.15, page 537). REASONS WHY PRICE WARS There are so many reasons why price wars can happen in an oligopoly market structure. Some of the reasons are due to
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