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Explain oligopoly's structure and use game theory to explain why oligopoly firms tend not to use price to compete.
Answer-
Oligopoly is an imperfect market where there are a few sellers in the market, producing either identical products or producing products which are close but not perfect substitutes of each other. Main features of this market are as follows-
1) Few sellers in the market.
2) Lack of uniformity.
3) Homogenous or differentiated product.
4) Advertisement and selling costs.
5) Interdependence of firms on each other.
6) Barriers on entry and exit.
Firms do not use prices to compete with each other because if a firm will reduce its product's price the other firm will respond by lowering its price too. The first will then react by further lowering its product's price. This way the firms will act and react on each other's decision relating to price change. This cut throat competition will reduce each firm's profits. On the other hand if the firm raises the price of product it is not certain if the other will also raise its price. In this case the firm will lose because its customers will shift to other firms product Therefore firms prefer not to compete on the basis of price rather they would prefer non-price competition as the monopolist firms do.
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