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How Do Firms behave In Oligopoly?

What is Oligopoly?

If the market place of a particular good comprises of more than one vendor; however, the number of vendors are few; such a market system is termed as an oligopoly.

The special scenario of oligopoly where there are exactly two vendors is termed as a duopoly. In scrutinising this market structure, we presume that the commodity sold by the two enterprises is homogeneous and there is no alternative for the commodity, manufactured by any other enterprise.

Provided that there are a few enterprises, each enterprise is comparatively large when compared to the size of a market. As an outcome, each enterprise is in a position to influence the total supply in the market and thus impact the market cost price.

For instance, if the 2 enterprises in a duopoly are equivalent in size, and one of them determines to double its outcome, the total supply in the market place will increase considerably, resulting the cost price to decrease. This decrease in cost price influences the profits of all enterprises in the production industry.

Other enterprises will acknowledge such a move in order to protect their own profits by making good decisions concerning how much to manufacture. Hence, the degree of output in the production industry, the degree of cost prices, and the profits are the results of how enterprises are interacting with each other. At one point,

  • Enterprises could decide to ‘conspire’ with each other to maximize cumulative profits
  • In this scenario, the enterprises shape a ‘conglomerate’ that acts as a monopoly
  • The amount supplied cumulatively by the production industry and the cost price incurred is the same as a single monopolist would have done

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