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Oligopoly (Features (Mutual Interdependence (1) The actions of one firm…
Oligopoly
Features
Nature of Product
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2) Some, however, sell homogeneous products such as cement (UK) and steel(US).
Imperfect Knowledge
1) Imperfect knowledge exists in the market due to high market power of firms giving rise to the ability to withhold information from consumers
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Mutual Interdependence
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2) When one changes its price, it has a significant effect on the other firms in the market.
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4) Therefore, when an oligopolist makes pricing and output decisions, it must take into consideration the reactions of the other firms in the market.
5) In this sense, the pricing and output decisions of an oligopolist depend on the behavior of competitors.
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Dynamic Efficiency
1) Make supernormal profit in the long run, have the ability to engage in research and development.
2) Competition gives them the incentive to engage in research and development and this is true even in the presence of collusion as oligopolists which collude still face non-price competition.
3) Therefore, oligopolists engage in research and development and are hence dynamically efficient.
4) Product innovations will lead to a greater product variety or higher product quality and process innovations will lead to a lower cost of production.
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Behavior
1) Oligopolies are price setters as they have high monopoly power over their products and do not have too many competitors due to product differentiation and high barriers to entry.
2) However, the firms are mutually dependent upon each other and price and output decisions of one firm can influence that of the others
Economic Efficiency
Productive Efficiency : Achieved when all firms produce along their long run average cost (LRAC) curve at any given output level.
Allocative Efficiency (P=MC) : Achieved when resources are used in a way such that it is impossible to make someone better off without making anyone else worse off.
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