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Non-Competitive Markets

Question
CBSEENEC12013510
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Explain why firms are mutually interdependent in an oligopoly market.

Solution

Oligopoly in a commodity market occurs when there are a small number of firms producing a homogenous commodity. There are two types of oligopoly, collusive and non-collusive. Oligopoly market structure consists of only a few firms. The firms under such a market structure experience a high degree of mutual interdependence. Firms are interdependent because each firm takes in to consideration the likely reactions of its rival firms when deciding its output and price policy.  It makes a firm dependent on other firms. The firm may have to reconsider the change in the light of the likely reactions. The price and output policy of a firm affects the policies and profit of another firm. This is because when one firm lowers (rises) its prices, the rival firms may or may not follow suit. This makes the demand curve under the oligopoly market structure indeterminate, thereby makes the firms mutually interdependent in an oligopoly market.

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