Question

What are the characteristics of oligopoly markets. Why would a graph of one firm in an oligopoly market be insufficient in explaining how such firms would makes decisions? How does the economist determine what choices the oligopoly firm would make (what method does the economist use)?

Answer 1

Answer - The oligopoly is the type of market in which there are few firms in the industry. The firms are interdependent on each other for the price and output decisions . There are the formation of the cartels and the firm not adhering to the policies of the cartel has to leave. There can be minimum of two firms in the oligopoly called the duopoly. There are barriers to the entry and exit of new firms and the firms are earning positive economic profits.

The firms are interdependent on each other and the actions of one firm are decided upon by the other firms. This is the reason why graph of just one firm is insufficient to study the behaviour of oligopoly

The economists use the tools of the game theories and study the nash equlibrium of the firms in studying the behaviour of the oligopoly firms.