Question

Why do oligopolists rely on a price leader to raise the market price of a product?

Answer 1

A pure monopoly maximizes earnings by generating the amount in which marginal revenue is the marginal cost. However, determining at what production it can maximize its profit is much more hard for an oligopoly. There are two main reasons for this: the oligopolistic firms ' interdependence and their variety, particularly in terms of concentration ratios. Some oligopolies have a very elevated concentration ratio, enabling them to behave more like a monopoly, while other sectors have a much reduced concentration ratio, making it harder to determine the best price approach, as the amount of possible competitor reactions is increasing.

Prices of oligopolies alter much less commonly in a stable economy than under any other model of the market, such as pure competition, monopoly competition, and even monopoly.
When prices change, companies usually move in the same direction and in their price modifications by the same magnitude, which can be the consequence of collusion.

The curve of kinked demand describes why companies withstand price adjustments in an oligopoly. If one of them increases the price, the other's market share will be lost. If it reduces its price, the other companies will match the reduced price, resulting in less profit for all companies.

The challenging market model is an oligopolistic model based on entry barriers and exit barriers that determine the cost and performance of the company. If the obstacles are high, greater prices will be set by the oligopolist. On the other side, if the obstacles are small, the oligopolist will set high rates to avoid fresh companies from joining the sector or to encourage their rivals to leave.

Sometimes companies attempt to form a cartel in an oligopoly by agreeing to set rates or split the market among themselves, or by some other manner restricting competition. The Cartel Model's main feature is collusion between oligopoly companies to set rates or limit competition in order to gain monopoly earnings.