Define oligopoly and give an example of strategic interaction.

Define oligopoly and give an example of strategic interaction.

• A. A market with many firms whose decisions are independent; pricing is determined by random shocks.
• B. A market with a few firms whose decisions are interdependent; examples include airline pricing or smartphone markets with rivals' responses.
• C. A market with a few firms whose decisions are independent; examples include farmers markets.
• D. A market with one dominant firm setting price; the rest are price takers.

Answer: (B)

Oligopoly is a market with a small number of firms that have enough market power to influence prices and output, and each firm must consider the likely reactions of its rivals when making decisions. This interdependence—strategic interaction—is what makes oligopoly distinct: actions by one firm prompt responses from others, shaping the profitability of all. The example of airline pricing or smartphone markets fits well because firms continuously adjust prices, features, or promotions while predicting how rivals will respond, leading to a pattern of strategic moves rather than independent, random decisions. The other descriptions miss that core dynamic: markets with many firms under random shocks lack interdependence; a few firms acting independently don’t exhibit the mutual influence that defines oligopoly; and a single dominant firm with price-taking competitors resembles a monopoly, not an oligopoly.

Oligopoly is a market with a small number of firms that have enough market power to influence prices and output, and each firm must consider the likely reactions of its rivals when making decisions. This interdependence—strategic interaction—is what makes oligopoly distinct: actions by one firm prompt responses from others, shaping the profitability of all. The example of airline pricing or smartphone markets fits well because firms continuously adjust prices, features, or promotions while predicting how rivals will respond, leading to a pattern of strategic moves rather than independent, random decisions. The other descriptions miss that core dynamic: markets with many firms under random shocks lack interdependence; a few firms acting independently don’t exhibit the mutual influence that defines oligopoly; and a single dominant firm with price-taking competitors resembles a monopoly, not an oligopoly.