Managerial Economics and Business Law Oligopoly Act

Question :

This Assignment requires a combination of short paragraph answers and computations. Answer all of the following questions in this document. You are required to follow proper APA format. 

Do the firms in an oligopoly act independently or interdependently? Explain your answer.

Answer :

It is the most important feature of oligopoly market in decision-making by the firms. Because of only few firms in the market, there is a great competition among the firmsAs because a few number of competitors in the market, a sling change in the output or price by a particular firm will impact the action of the rival firms who would respond back by changing the price of their product or by way of advertisement. It is therefore concluded that in case of oligopoly market, a firm should consider not only the demand for its own product but also should consider the actions of rival firms. A firm in the oligopoly market which does not consider the action of its competitors while deciding its own strategy, it may suffer a reduction in its profit. The effect of interdependence is that there is a requirement by a firm in the oligopoly market to make use of various aggressive marketing techniques to have share of market for its product. It totally depends upon how rival firms behave. If rival firms do not behave in a competitive manner, then the firm will have more market power and will be able to charge price for its product above marginal cost.

a) To maximise the profit, the firm should produce 4 units of output since its profit is maximum at this level.

b) At the 7th unit of output, though the firm is incurring a loss, it may not have to shut down its operation in short run. It must compare its total revenue with the variable cost. If its total revenue is more than its variable cost, it should continue operation to recover a part of its fixed cost. However, it must shut down its operation if its TR is less than its VC.

a) The firm should produce 2 units of output to maximize profit.

b) The firm should shut down its operation since its TR is not sufficient to recover even VC. 

a) A dominant strategy refers to that strategy which is best for one firm irrespective of the strategy followed by the other firm. No, the Wal World does not have dominant strategy because irrespective of the strategy followed by Wal World, the strategy to be followed by Tarbo would bring more earning to Tarbo as compared to Wal World. In case, the new bar code technology is chosen by Tarbo, more money would be earned by Tarbo as compared to Wal World.

b) No, Tarbo does not have dominant strategy since Tarbo gets a greater payoff by way of choosing strategy like the strategy followed by Wal World. Tarbo might not have dominant strategy irrespective of the category of strategy chosen by Wall World.

c) A Nash equilibrium refers to the situation in the game wherein given the decision of the other player, strategy to be chosen by each player might give him the highest payoffs. There are two Nash equilibrium in the given game.