Answer:
1. A small number of firms produce a large proportion of industry output.
2. A firm that is large may be able to produce at a lower unit cost than can a small firm.
3. That oligopolists can increase their profits through collusion.
Explanation:
An oligopoly can be defined as a market structure comprising of a small number of firms (sellers) offering identical or similar products, wherein none can limit the significant influence of others.
Hence, it is a market structure that is distinguished by several characteristics, one of which is either similar or identical products and dominance by few firms.
The characteristics of an oligopolistic market structure are;
I. Mutual interdependence between the firms.
II. Market control by many small firms.
III. Difficult entry to new firms.
Under the game theory, when firms makes a decision about their business, it is expected that they consider how the other firms would react to such decisions.
1. The mutual interdependence that characterizes oligopoly arises because a small number of firms produce a large proportion of industry output.
2. If there are significant economies of scale in an industry, then a firm that is large may be able to produce at a lower unit cost than can a small firm.
3. Game theory can be used to demonstrate that oligopolists can increase their profits through collusion.
