Essay on Firms' Incentives to Avoid Price Competition in Oligopoly Markets

Essay on 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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