A Level Economics AQA Practice Exam

How do firms typically behave in a non-collusive oligopoly?

1. By reducing advertising to cut costs

2. By avoiding formal agreements to fix prices

3. By producing identical products to stand out

4. By colluding to divide the market

The correct answer is: By avoiding formal agreements to fix prices

In a non-collusive oligopoly, firms operate in a market structure where they are interdependent but do not form formal agreements, such as cartels, to manipulate prices or output collectively. Instead, each firm makes independent decisions while considering the potential reactions of its competitors. This type of behavior arises from the fear that any attempt to collude may fall apart if one firm decides to break away and pursue its self-interest, often leading to price wars or significant market fluctuations. By avoiding formal agreements, firms maintain their competitive edge and flexibility, reacting to market changes rather than being locked into a fixed pricing strategy or output level. This behavior is a fundamental characteristic of non-collusive oligopolies, where firms strive to maximize their own profits while acknowledging the impact of their actions on rivals and the market as a whole.