Price rigidity is a situation found in which of the following market f...
An oligopoly is a market structure in which a few firms dominate. When a market is shared between a few firms, it is said to be highly concentrated. Although only a few firms dominate, it is possible that many small firms may also operate in the market.
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Price rigidity is a situation found in which of the following market f...
Price rigidity is a situation where prices tend to remain relatively stable or inflexible despite changes in market conditions. In other words, prices do not adjust quickly to changes in demand and supply, leading to a lack of price flexibility. This phenomenon is often associated with oligopoly market forms.
Oligopoly is a market structure characterized by a small number of large firms dominating the market. These firms have significant market power and can influence the market price. Due to the interdependence of firms in an oligopoly, they are often reluctant to change their prices frequently. This leads to price rigidity in the market.
Below, I will explain why price rigidity is more likely to occur in an oligopoly market compared to other market forms:
1. Limited number of firms:
- In an oligopoly, there are only a few firms that dominate the market.
- These firms are highly aware of their competitors' actions and are interdependent.
- Any change in price by one firm can have a significant impact on the other firms' market share and profitability.
2. Mutual interdependence:
- In an oligopoly, the actions of one firm can directly affect the market conditions and the profits of other firms.
- When one firm lowers its price, it can trigger a price war, forcing other firms to retaliate by lowering their prices as well.
- This creates uncertainty and makes firms hesitant to change prices frequently, leading to price rigidity.
3. Strategic behavior:
- Firms in an oligopoly often engage in strategic behavior to maintain their market share and profitability.
- They may use non-price competition strategies such as advertising, product differentiation, or quality improvements.
- These strategies aim to create brand loyalty and minimize the need for price adjustments.
4. Barriers to entry:
- Oligopolistic markets are often characterized by significant barriers to entry, such as high capital requirements or economies of scale.
- This reduces the threat of new competitors entering the market and puts the existing firms in a stronger position to maintain price stability.
In contrast, perfect competition, monopoly, and monopolistic competition do not exhibit the same level of price rigidity as oligopoly. In perfect competition, there are many small firms that have no market power, and prices are determined by market forces of supply and demand. Monopoly and monopolistic competition may have some price flexibility, but they are also subject to regulation and market conditions.
Overall, price rigidity is more commonly observed in oligopoly market forms due to the limited number of firms, mutual interdependence, strategic behavior, and barriers to entry. These factors create an environment where firms are hesitant to change prices frequently, leading to price rigidity.
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