Question

The textile industry in a foreign country is controlled by four major companies. Last week, one of the companies decided to cut prices as a way to expand inventory. Since this industry is an oligopoly, what will be the likely response of the other three companies

Answer 1

Answer: e. They will make similar price cuts.

Explanation:

In an Oligopoly, there are few Firms in the market and as such if they colluded, they could control the market.

They rarely do however due to the legal and operational complexities of such a move so they exist in a sort of state where all the firms charge a set price and avoid changing this.

This is because if one firm increases price, they will lose market share.

If another firm reduces price, they might be able to capture more Market share so all the other firms reduce price as well to maintain their market share. This latter scenario would see them all maintain market share but have less profit due to charging less.

I digressed.

When a firm in an Oligopolistic Market reduces price, the other firms follow suit.