As the number of firms in an oligopoly grows large, the...

As the number of firms in an oligopoly grows large,
the industry approaches a level of output that is
________ the competitive level and ________ the
monopoly level.
a. less than, more than
b. more than, less than
c. less than, equal to
d. equal to, more than

Key Concepts

Monopoly

A monopoly exists when a single firm dominates the market, allowing it to exert significant control over price. In a monopolistic market, the firm restricts output to raise prices above the competitive level, resulting in lower quantities produced and allocative inefficiency. Monopoly output is typically lower than what would be seen in more competitive market structures.

Convergence in Oligopoly

As the number of firms in an oligopoly increases, the competitive pressures intensify, pushing the industry output toward the competitive equilibrium level. Although the outcome remains different from a perfect competition scenario due to remaining market power and strategic interactions, the aggregate output becomes higher than that produced by a monopolist. This convergence implies that the industry produces an amount equal to the competitive level and more than the monopoly level as the market becomes less concentrated.

Competitive Market

A competitive market is one in which there are many buyers and sellers, none of whom can influence the market price. In such markets, firms are price takers, and the level of output is determined by the forces of supply and demand. The equilibrium output in a competitive market maximizes total surplus, leading to an efficient allocation of resources.

Oligopoly

An oligopoly is a market structure characterized by a small number of interdependent firms, each of which must consider the potential reactions of its competitors when making decisions about output and pricing. The strategic behavior in oligopolies can lead to outcomes that differ from both perfect competition and monopoly, and as the number of firms increases, the market results tend to shift towards more competitive outcomes because each firm's market power diminishes.

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