Firms' Incentives to Avoid Price Competition in Oligopoly Markets

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Firms' Incentives to Avoid Price Competition in Oligopoly Markets

In the UK a few, large firms dominate most industries. These

industries are known as oligopoly markets. Oligopoly markets are an

example of imperfect competition. It consists of a market structure in

which there is a small number of large firms in the industry hence is

relatively highly concentrated. Barriers to entry and exit are also

likely to exist. In oligopoly markets there is product

differentiation, the extent of which depends on the type of product

produced. This leads to interdependency, as the actions of one large

firm will directly affect another large firm. Therefore, firms are

said to be operating under conditions of uncertainty because firms are

unable to judge the future actions of their competitors and hence

their own firm's future.

For example, if an oligopolist firm raises its prices, it could risk

loosing market share if its competitors do not follow which would lead

to lower profits for that firm. If the firm was to reduce prices, it

...

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