Which of the following statements about oligopoly is incorrect?

Which of the following statements about oligopoly is incorrect?
A . A few firms play an important role in the sale of a product
B . Oligopolistic firms recognize their interdependence
C . One firm’s behaviour is a function of what its rivals do
D . Prices in oligopoly are predicted to fluctuate widely and frequently

View Answer

Answer: D

Explanation:

An oligopoly exists when there are small number of producers that exert a significant influence in the market. Oligopoly’s main characteristics are discussed as follows: – Interdependence

The most important feature of oligopoly is the interdependence in decision¬-making of the few firms which comprise the industry. This is because when the number of competitors is few, any change in price, output, product etc. by a firm will have a direct effect on the fortune of its rivals, which will then retaliate in changing their own prices, output or products as the case may be.

– Importance of advertising and selling costs

A direct effect of interdependence of oligopolists is that the various firms have to employ variousaggressive and defensive marketing weapons to gain a greater share in the market or to prevent a fall in their market share. For this various firms have to incur a good deal of costs on advertising and on other measures of sales promotion. Therefore, there is a great importance of advertising and selling costs under conditions of market situation characterised by oligopoly – Group behaviour

Another important feature of oligopoly is that for the proper solution to the problem of determination of price and output under, it analysis of group behaviour is impor-tant. – Indeterminateness of demand curve facing an oligopolist

In this question, ‘Prices in oligopoly are predicted to fluctuate widely and frequently’ is an incorrect statement as producers in oligopoly often try to set up price. Prices fluctuate more frequently in perfect competition.

LO 2, AC 2.2