ACCA Performance Management (F5) Certification Practice Exam

What is the defining feature of an oligopoly?

1. A single seller dominating the market

2. Many sellers with differentiated products

3. A few companies that are interdependent

4. Free entry and exit for all firms

The correct answer is: A few companies that are interdependent

The defining feature of an oligopoly is the presence of a few companies that dominate the market, exhibiting interdependence among them. In this market structure, the actions of one firm directly impact the others, leading to strategic behavior in pricing and output decisions. Firms in an oligopoly not only consider their own strategies but also anticipate how competitors will respond, resulting in a careful balance of competition and cooperation. This interdependency is crucial; for instance, if one company decides to lower its prices, others may follow suit to maintain market share, leading to potential price wars. Conversely, if a firm introduces a new product or service, it may force other firms to innovate or adjust their offerings to remain competitive. This interplay differentiates oligopolies from other market structures where firms operate independently without significant influence from their competitors. In contrast, a single seller dominating the market characterizes a monopoly, while many sellers with differentiated products describe monopolistic competition. Free entry and exit for all firms is a feature typically associated with perfect competition, not oligopoly. Thus, interdependence among a few firms is central to understanding the dynamics of an oligopolistic market structure.