Question

2. Why is allocation of market share such a central feature in determining the decisions of firms in the cartel model of oligopoly and what is the central feature determining the decisions of firms in the contestable market model of oligopoly?

Answer 1

Here are the following answer

Under this type of market, prices are normally rigid as firms are afraid of immediate reactions of the rival firms which may start price war. The demand curve facing an oligopoly firm is indeterminate because of high degree of interdependence and uncertainty among oligopolistic firms. The firm does not know how his rival firms react to its decisions. Sales and profits of the firms are affected by the rivals' firm's actions.

There are various barriers to the entry of new firms. These barriers are almost similar to those under monopoly. Entry of new firms is extremely difficult, if not impossible.

Example: there are only a few auto-producers in the Indian market. Maruti, Tata, Ford, Fiat are some well-known brand names.