Question

How is price and output determination done under Oligopoly?

Answer 1

Oligopoly is a market with a few dominant firms whose decisions are mutually interdependent. Unlike perfect competition or monopoly, price and output are indeterminate, as each firm’s demand depends on rival reactions.

Price-output is explained through different models:

• Collusive Oligopoly (Cartel): Firms cooperate and act like a monopoly, fixing price and output jointly to maximize industry profits.
• Price Leadership: One dominant firm sets the price; others follow. The leader’s output is set where MC = MR, and the same price applies to the whole industry.
• Non-Collusive Oligopoly (Kinked Demand Curve): If a firm raises price, rivals do not follow; if it cuts price, rivals match. This creates a kinked demand curve with a discontinuous MR, leading to price rigidity.

Thus, under oligopoly, price and output depend on whether firms collude or compete, but stability of prices is common.