In an oligopoly, which of the following best describes the behavior of firms?

• A. Firms are interdependent and consider rivals' actions when making decisions.
• B. Firms act independently and ignore competitors.
• C. Firms can freely enter and exit the market without barriers.
• D. There are many small firms with no market power.

Answer: (A)

Verified step by step guidance

1. Understand the definition of an oligopoly: it is a market structure characterized by a few firms that dominate the market.
2. Recognize that in an oligopoly, firms are interdependent, meaning each firm's decisions (such as pricing, output, or advertising) affect and are affected by the decisions of rival firms.
3. Recall that because of this interdependence, firms in an oligopoly carefully consider the potential reactions of their competitors when making strategic decisions.
4. Contrast this with other market structures: perfect competition has many small firms with no market power, and free entry and exit is typical there; monopoly has a single firm; and in some models, firms act independently, but this is not the case in oligopoly.
5. Conclude that the best description of firm behavior in an oligopoly is that firms are interdependent and consider rivals' actions when making decisions.