Explain the implications of the following in an oligopoly market:
(i) Interdependence between firms
(ii) Barriers to the entry of new firms
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(i) when there are only a few firms in a market, it is likely that each has some knowledge as to how its rivals operate. Each firms expect reaction from its rival firms. Therefore each firms, in deciding price and output, takes into account the expected reactions by its rivals. In this way firms are interdependent on each other.
(ii) The main reason why the number of firms is small is that there are barriers which prevent entry of firms into industry. Patents, large capital requirement, control over crucial raw materials, etc prevent new firms from entering into industry. Such barriers make an industry oligopoly.
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