What is meant by an oligopoly being both interdependent and uncertain in their price strategies?

Interdependence the limited number of players, each firm's actions, especially regarding pricing, directly affect the others. For example, if one firm lowers its prices, it can significantly impact the market share of the other firms. This interdependence means that firms in an oligopoly must consider the potential reactions and strategies of their competitors when making pricing decisions. They often closely monitor each other's actions and may respond to changes made by one firm with similar changes of their own. Uncertainty This interdependence leads to uncertainty in price strategies. Since each firm's success is closely tied to the actions of its competitors, it's challenging to predict the market's reaction to any one firm's pricing strategy. A price cut by one firm might lead to a price war, where all firms reduce their prices, or it might not be matched by competitors, leading to a shift in market shares. The uncertainty arises because it's difficult to predict the exact reactions of competitors, which could range from aggressive responses to no response at all. In essence, firms in an oligopoly are constantly trying to outguess and outmaneuver each other with their pricing strategies, leading to a situation where strategic planning is complex and filled with uncertainties. This dynamic often results in price rigidity, where firms are reluctant to change prices due to the unpredictable consequences of such actions.

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Answered by: Krysia KEconomics Tutor
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