Multiple Choice
In an oligopoly, which of the following best describes the behavior of firms?
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14. Oligopoly
Characteristics of Oligopoly
Multiple Choice
Which of the following market conditions would most likely create the setting for an oligopoly?
A
A market with a single firm controlling the entire supply
B
A market with many small firms and free entry and exit
C
A market where products are perfectly differentiated and firms have no market power
D
A market with a few large firms dominating the industry and significant barriers to entry
Verified step by step guidance1
Step 1: Understand the definition of an oligopoly. An oligopoly is a market structure characterized by a few large firms that dominate the industry, often with significant barriers to entry preventing new competitors from easily entering the market.
Step 2: Analyze each option in the problem to see which matches the characteristics of an oligopoly. For example, a market with a single firm controlling the entire supply is a monopoly, not an oligopoly.
Step 3: Recognize that a market with many small firms and free entry and exit describes perfect competition, which is the opposite of an oligopoly.
Step 4: Note that a market where products are perfectly differentiated and firms have no market power is inconsistent with oligopoly, as oligopolies often have some degree of market power and product differentiation.
Step 5: Conclude that the correct setting for an oligopoly is a market with a few large firms dominating the industry and significant barriers to entry, as this matches the defining features of an oligopoly.
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