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CA Foundation · Business Economics · Price Determination in Different Markets

Three large cement companies in a region each have about 30% of the market and the rest is shared by small units. Each company avoids price cuts but spends heavily on advertising and brand promotion. This behaviour is best explained by which feature of oligopoly?

The behaviour reflects interdependence among oligopolistic firms. Since a price cut would be matched by rivals and cause a price war, firms avoid it and compete through advertising, branding and other non-price methods instead.

  1. AFree entry and exit of firms
  2. BInterdependence among firms leading to non-price competitionCorrect
  3. CPerfectly elastic demand for each firm
  4. DAbsence of product differentiation

Explanation

In oligopoly each firm's outcome depends on rivals' reactions. Since price cuts are quickly matched and trigger price wars, firms prefer non-price competition such as advertising. Free entry and perfectly elastic demand belong to other market forms.

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