Why is competition limited in an oligopoly?

• A. Because a few firms dominate the market and are interdependent in their decision-making.
• B. Because government regulation eliminates all forms of competition.
• C. Because there are no barriers to entry and many firms compete freely.
• D. Because products are always perfectly differentiated, leading to intense competition.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the definition of an oligopoly. An oligopoly is a market structure characterized by a small number of firms that dominate the market.
2. Step 2: Recognize that in an oligopoly, firms are interdependent, meaning the decisions of one firm affect the others, leading to strategic behavior rather than pure competition.
3. Step 3: Identify that because only a few firms control the market, each firm has significant market power, which limits the intensity of competition compared to more competitive markets.
4. Step 4: Note that barriers to entry in an oligopoly are typically high, preventing many new firms from entering and increasing competition.
5. Step 5: Conclude that competition is limited in an oligopoly primarily because a few firms dominate the market and their interdependent decision-making reduces the incentive for aggressive competition.