Which type of pricing strategy is followed in an oligopoly

Pricing Stratefy in Oliigopoly


In an oligopoly, there are 2 different pricing strategies that might be followed:

  • Price leadership. One firm in the market sets the price and all other firms follow suit (this is also called a "collusive" pricing strategy). For example, if Microsoft were to set its prices too high for Windows 10 (which would be unlikely because they have so much competition), Google could lower its prices on Android operating systems or Apple could lower its prices on macOS and iOS. This is why it's hard for these companies to raise their prices significantly without losing market share.
  • Price skimming. In this case, one firm raises its price high enough so that only wealthy customers will buy it—but once all those customers have bought it, then everyone else can buy at normal prices again (this is also called "sophisticated segmentation"). For example: If Ferrari were selling cars at $1 million each but then lowered them down to $500k each, many more people would buy them than if they just stayed at $1 million each forever!

What is Interdependence in the Oligopoly Market?

In interdependence, oligopolies have to consider the actions of other firms. For example, if one firm reduces its price or increases its advertising, other firms in an oligopoly market would be forced to do the same thing in order to survive. This form of competition is also called survival of the fittest because it leads to economic efficiency and profits for all firms.

In this case, you can use game theory models that show how firms respond strategically to each other when they engage in a market where they are dependent on each other's decisions regarding price and quantity produced/sold.

Interdependence Theory is one example:

Accordingly, interdependence theory assumes that all firms have similar costs so they cannot affect each other’s profit margins through changes in their own prices or quantities demanded (ceteris paribus).

In addition to this assumption about cost structures being identical across competitors’ products (homogeneous), another key assumption made by interdependence theory is perfect information across buyers as well as sellers such that no single buyer or seller has an advantage over others when making a purchase decision regarding product features offered by multiple sellers at varying prices per unit purchased by customers/consumers seeking such goods/services provided within this particular industry category defined by geographic location where individual memberships exist within this group known as “oligopolies” which form part of a larger system known as “markets”—specifically when competing against multiple rivals who may offer similar products but differ slightly from one another according to customer preferences based upon personal tastes

Can there be competition in an Oligopolistic market?

Yes, there can be competition in an oligopolistic market. Competition in an oligopolistic market is more intense than the competition in a monopolistic market and perfect competition market.

In an oligopoly, the firms are not so many to be able to divide the whole industry into different parts with each firm having its own part of the industry. But they are so many that their decisions will have a considerable effect on one another's profits and decisions.

So these firms have to take into account the reactions of others when making their own decisions about price, production, marketing strategy, etc., but still, they have some freedom to make independent decisions as well

Competition between these firms for particular customers or for particular raw materials or similar resources may lead to such fierce rivalry that one cannot exist without harming another's profits; this situation is called cutthroat competition.

What are barriers to entry in an Oligopoly market structure?

Barriers to entry are the things that prevent new competitors from entering an industry. They can be natural, legal, or economic.

Natural barriers to entry include economies of scale and network effects. Economies of scale occur when larger companies can produce a product at lower costs per unit than smaller companies because they have more efficient technologies or can use their size to negotiate lower prices with suppliers. Network effects occur when a product becomes more valuable as more people use it; this makes it hard for new competitors to enter the market because consumers won't want to switch away from using their current service (e.g., Facebook).

Legal barriers include patents and copyrights which may protect one company's products from being copied by another company or allow one company exclusive rights over production or distribution in certain territories under certain circumstances; these restrictions make it difficult for new competitors who want to enter those markets since they would need access/licenses/permits from both governments.

What are the limitations of the interdependence theory of oligopoly market structure?

  • The interdependence theory of oligopoly market structure is a good example of how a firm's actions can affect the actions of other firms in the market. However, there are some limitations to this theory that should be recognized:
  • It assumes that firms are not able to enter or exit the market. If a new firm enters the market, it would affect all existing firms' profits and would change their behavior and strategies.
  • In order to apply this model, it is necessary to identify all firms within an industry and their relative size. However, identifying all your competitors may not always be possible because some businesses might only be known through their products or services (e.g., advertising agencies).
  • As such, these businesses would have less information about them compared to their larger competitors and could have more difficulty determining what type of strategy should be used against them since they probably won't know who exactly they're competing with at any given time until after using standard pricing practices first.

Is it possible to apply game theory to an oligopolistic market situation where there are more than two firms competing with each other?

If you're familiar with game theory, you'll know that it's a mathematical model of conflict and cooperation between intelligent rational decision-makers. Game theory can be applied to oligopoly market structure because it is a strategic game. Oligopolies are dynamic environments in which firms interact strategically with each other. This means that the behavior of one firm will affect the strategy of another firm and vice versa.

Why can’t a price war last forever under an oligopolistic market situation?

The reason why a price war cannot last forever is that the law of diminishing returns will eventually kick in. When there are only a few firms competing with each other, they can all cut their prices at the same time and still maintain their profit margins.

However, after some time has passed and all firms have cut prices significantly, they will eventually run out of room to lower them anymore. At this point profits will start falling off until one firm gives up and restores its previous price level or leaves the market entirely (which we don’t want). Other firms may follow suit if they see that their competitor has been able to restore its profits by raising its price again.

List out the features of the game theory model and its application in real-life situations!

Game theory is a mathematical model of strategy. It is used to analyze the behavior of players in situations of conflict and cooperation. The most popular game theory models are those that deal with contests between only two contestants, called "zero-sum games." Zero-sum games have been widely used by economists because they involve direct conflict between the participants' interests. Game theory has also been applied to oligopoly markets where firms compete for market share as well as for-profits.

The main features of the game theory model are:

  • It is based on rational decision making
  • It assumes that players have perfect knowledge of each other's strategies and utilities and act accordingly
  • Each player has a limited number of possible strategies available at any given time

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