Which of the following market conditions would most likely create the setting for an oligopoly?

• A. A market with a single firm controlling the entire supply
• B. A market with many small firms and free entry and exit
• C. A market where products are perfectly differentiated and firms have no market power
• D. A market with a few large firms dominating the industry and significant barriers to entry

Answer: (D)

Verified step by step guidance

1. Step 1: Understand the definition of an oligopoly. An oligopoly is a market structure characterized by a few large firms that dominate the industry, often with significant barriers to entry preventing new competitors from easily entering the market.
2. Step 2: Analyze each option in the problem to see which matches the characteristics of an oligopoly. For example, a market with a single firm controlling the entire supply is a monopoly, not an oligopoly.
3. Step 3: Recognize that a market with many small firms and free entry and exit describes perfect competition, which is the opposite of an oligopoly.
4. Step 4: Note that a market where products are perfectly differentiated and firms have no market power is inconsistent with oligopoly, as oligopolies often have some degree of market power and product differentiation.
5. Step 5: Conclude that the correct setting for an oligopoly is a market with a few large firms dominating the industry and significant barriers to entry, as this matches the defining features of an oligopoly.