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Question
Explain the cause of the limited number of firms in an oligopoly market.
Solution
Main reasons for a small number of firms in the oligopoly market:
Size of capital and selling cost for certain products may be too high, and hence, many investors would not be able to invest in such products. Under this market, a small number of large firms dominate the market for a product through extreme advertising. Also, they invest on Research and Development activities to observe competitors in the market.
Entry of new firms is restricted through patent rights. These patent rights are acquired by certain firms for their innovative technology in the production process. Hence, the existing
firms need not be concerned about the entry of new firms. Each firm is huge enough to control a significant portion of the market. Output quotas and prices have a direct bearing on the output and price of rival firms in the market. They form a collusive agreement among the firms to fix the price and output in the market. This will not encourage the firms to enter the market.
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