Oligopoly

Explain why prices tend to be quite stable in a non-collusive oligopoly.

Oligopoly is where a few firms dominate an industry. Some oligopolistic firms produce almost the same product, for example petrol. Some firms produce highly differentiated products such as motor cars. Others produce less differentiated products, such as Shampoo. A non-collusive oligopoly is when firms in an oligopoly industry don't cooperate with other firms in the industry and therefore have to be very aware of the reactions of other firms when making pricing decisions. So when a firm lowers the price of their product, they have to increase their output which means higher costs for the production of their product. Consequently, their total revenue will fall because the demand for the product is more inelastic than before. Hence their total cost will increase. When their total costs increase their profits will decrease. As a result non-collusive oligopolistic firms tend to have relatively stable prices since raising prices by decreasing output and decreasing prices while increasing output can both harm an oligopolistic firm. Therefore non-collusive oligopolistic firms incline to produce between the point a and b on the diagram below. Nomatter where the marginal cost curve intercects the marginal revenue curve inbetween a and b the price will stay the same and therefore it remains stable.