ACCA Applied Knowledge · Business and Technology · Competitive factors
Zentra Ltd operates in an industry where a handful of large firms dominate. When one firm cuts its price, the others usually follow quickly, so firms tend to avoid price competition and instead compete through advertising and product features. Which characteristic of oligopoly does this behaviour best illustrate?
The behaviour illustrates interdependence, the key feature of oligopoly. With few large firms, each one's pricing decision provokes responses from rivals, so firms avoid price cuts and compete through advertising and product features. Free entry, price-taking and single-firm supply are not features of oligopoly.
- AInterdependence of firms' decisionsCorrect
- BFree entry and exit by new firms
- CHomogeneous products sold by price-taking firms
- DA single firm controlling all supply
Explanation
In an oligopoly each firm's actions affect rivals, who react, so firms are interdependent. That is why price wars are avoided and non-price competition is used. Free entry and price-taking are not characteristics of oligopoly, and a single supplier describes monopoly.
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