Question

In a non-collusive oligopoly if one firm increased its price what would the other firms likely do? What about a price decrease?

Answer 1

Oligopoly is a type of market structure where there are few firms producing either homogeneous (goods that are perfect substitutes of each other) or differentiated goods (goods that are differentiated in some kind either in terms of quality, packaging, or marketing strategies, etc. Since there are few firms producing the goods, there is tough competition between them to gain maximum profits and market share.

Under the oligopolistic market structure, in some markets, the firms collude and take their price and output decisions together and they are called collusive oligopoly models. And, in some cases, these firms do not collude and act independently as separate firms taking their own price and output decisions and they are called a non-collusive oligopoly.

In a non-collusive oligopoly, the firms do not collude and take their decisions independently. They act in a way to maximize their profits and gain maximum market share and thus there is tough competition between them. Here, if one firm increases the price, the other firms don't follow and let that firm face loss of losing its customers that won't buy at that price. On the other hand, if one firm decreases the price, the other firms will follow and also decrease the price so that they themselves don't lose their customers. Thus, we can see that here, a price increase is not followed and a price decrease in followed.

This makes the demand curve of a non-collusive oligopoly with a kink in it. Since the price increase is not followed, the portion above the kind in the demand curve is relatively elastic and since the price decrease is followed, the portion below the kink in the demand curve is relatively inelastic. Thus, in the non-collusive oligopoly, the market price is inflexible and it remains at the kink point of the demand curve.