ACCA Applied Knowledge · Business and Technology · Competitive factors
A small number of large airlines dominate a region. When one cuts fares, the others quickly match it, and they prefer to compete through loyalty schemes and service rather than price. Which feature of this market structure does this behaviour best illustrate?
The behaviour illustrates interdependence of firms in an oligopoly. With few large sellers, each firm's price move triggers reactions from rivals, so they avoid price wars and compete through loyalty schemes and service instead. Price-taking and free entry characterise perfect competition, not this market.
- AInterdependence of firms in an oligopolyCorrect
- BPrice-taking behaviour in perfect competition
- CAbsence of barriers to entry
- DSingle-seller price discrimination
Explanation
In an oligopoly each firm's decisions affect rivals and provoke responses, so firms are interdependent. This often leads to non-price competition to avoid damaging price wars. Price-taking and free entry do not fit a market dominated by a few large firms.
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