Question

Briefly explain the implication of the following:

Intense competition in oligopoly

Answer 1

Intense competition in an oligopoly means each firm must closely watch rivals because any price, output or product move will trigger reactions; this strategic interdependence creates uncertainty about demand and makes decision‑making more complex. As a result firms may engage in aggressive price wars or, alternatively, settle into price rigidity (the kinked‑demand outcome), shift competition to non‑price arenas (heavy advertising, product differentiation) which raises selling costs, or attempt collusion/price‑leadership to stabilize profits. The net effect for consumers and welfare therefore depends on whether rivalry lowers prices and spurs innovation or whether collusion and high marketing costs negate those benefits.