A Level Economics AQA Practice Exam

In an oligopolistic market, what is a common strategy among firms?

1. Aggressive price competition

2. Collusion to set prices

3. Complete independence in pricing

4. Elimination of product differentiation

The correct answer is: Collusion to set prices

In an oligopolistic market, firms often experience interdependence due to the limited number of competitors. This interdependence leads firms to adopt collusive strategies to set prices in order to maximize their collective profits. Collusion can take the form of formal agreements or informal understandings between firms, allowing them to act together rather than competing fiercely against one another. When firms collude to set prices, they effectively circumvent the competitive pressures that would normally drive prices down, enabling them to maintain higher profit margins. Collusion can also include strategies like market sharing or production quotas. This behavior is particularly common in oligopolistic markets because the actions of one firm can have significant impacts on the profits and pricing strategies of others, making cooperative behavior advantageous to all parties involved. Price competition tends to be more characteristic of perfectly competitive or monopoly markets, while complete independence in pricing is less likely due to the high level of strategic interdependence in oligopoly. Additionally, the elimination of product differentiation does not align with oligopolistic behavior, as firms typically compete on both price and non-price factors, including branding and features, to maintain market share.