Which of the following correctly explains the dominant firm model of an oligopoly?
A) The firm that sets the lowest price gains the entire market share.
B) A single firm sets a price which is lower than the current market price and gains market share at the expense of the other firms.
C) A single firm sets the price in the market, which is taken as given by the other smaller firms.
D) Each firm in the market sets its price based on the reaction of the other firm.
E) The firms in the market collude and set prices in order to maximize their combined profits.

Question

Quizplus · Accepted Answer

In the dominant firm model of an oligopoly, a single firm sets the price in the market, which is taken as given by the other smaller firms. This dominant firm can either set a high price and enjoy a high profit margin or set a low price and gain market share at the expense of other firms. The key characteristic of this model is the assumption of a dominant firm that has significant market power and sets the price for the entire market.

Which of the Following Correctly Explains the Dominant Firm Model