When two firms interact in an oligopolistic market, which of the following statements is true?

• A. Collusion is impossible in oligopolistic markets.
• B. Firms in oligopoly always act independently without considering competitors.
• C. Each firm's optimal decision depends on the expected actions of the other firm.
• D. Oligopolistic firms cannot influence market prices.

Answer: (C)

Verified step by step guidance

1. Understand the nature of an oligopolistic market: it is a market dominated by a small number of firms, where each firm's decisions can significantly affect the others.
2. Recognize that in oligopoly, firms are interdependent, meaning each firm must consider how its competitors might react to its actions when making decisions.
3. Analyze the given statements: 'Collusion is impossible' is false because firms can and sometimes do collude; 'Firms always act independently' is false because they consider competitors' actions; 'Oligopolistic firms cannot influence prices' is false because they often have some price-setting power.
4. Identify that the true statement is that each firm's optimal decision depends on the expected actions of the other firm, reflecting strategic interdependence.
5. Conclude that this interdependence is a key characteristic of oligopolistic markets, often modeled using game theory concepts like the Nash equilibrium.