Chapter 64, Problem 6MCQ

To determine

To state: When will the oligopolistic firms that engage in direct competition stop undercutting each other's prices?

Answer to Problem 6MCQ

The correct option is C i.e price a perfectly competitive firm would charge.

Explanation of Solution

Oligopolistic firms that involve in direct competition will end up undercutting each other's prices when the price reaches the price a perfectly competitive firm would charge.

This is known as price competition i.e when the firms produce perfect substitutes and have enough capacity to fulfill the demand of the customers when the price is equal to MC (marginal cost), in this case, each firm will be forced to involve in competition by undercutting its competitor's price till the point the price reaches MC (marginal cost) - that is, perfect competition.

Economics Concept Introduction

Introduction:

Oligopoly: is defined as a market structure in which a market or an industry is controlled by a small number of large producers or sellers. Oligopolies are often interdependent in their output and pricing policies. These are an outcome of the aspiration to maximize profits, usually resulting in collusion between companies.