Question

Firms in oligopoly must constantly think in terms of how other firms in the industry will react to whatever they do. Why do they have to do this? Why is it that firms in perfect competition and in monopoly don’t have to worry about how other firms will react?


(please put resources for your answer)

Answer 1

Because, in oligopoly market, there are few number of sellers and large number of buyers. Total Market demand is genuinely shared by small number of firms.

So, if any firm in oligopoly decreases its prices then all the consumer's demand will shift towards that firm and hence, revenues and profit of that firm will increase. As a result, other firms in oligopoly will face negative profits. So, firms in oligopoly must constantly think in terms of how other firms in the industry will react to whatever they do.

But, in perfect competitive market, the firms are price taker and there are large number of sellers in this market.

Also, in monopoly market, there is single seller. Being a single seller of any particular product in market, they dont worries about others.

Resources:- Microeconomics book by Robert pindyck.