posted by Susan on .
What are the conditions for an oligolpolistic market? How do oligopolies determine the level or output at which they will produce?
I know the three condition for a oligopoly market.
1. There has only a few large firms.
2.Market has high barriers to entry.
3. Firms may produce products that areeither defferantiated or homogeneous.
Is this part correct? I not clear as to the second question.
in 1) I would add the word "dominant" after the word large.
in 3) practically all goods in all markets except monopolies are differentiated or homogeneous. For a third condition of a oligopolistic market, I would add "firms tend to collude.
In part 2, How do oligopolies determine price. There are a number of explanations, and it depends on whether the goods are homogeneous or not. First, is that the firms overtly or covertly collude and set prices. Then, there is the dominant firm model, which says the dominant firm sets the price and the other firms fall in line. There is the Cournot model which suggest each firm tries to estimate what the other firms will do, and then based on this finding, the firm produces to maximize its own profits.
for mor info start here: http://en.wikipedia.org/wiki/Oligopoly