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Why might firms have an incentive to avoid price competition in oligopoly markets; why nevertheless might price wars breakout, illustrate your answer with relevant examples.

In the UK a few, large firms dominate most industries. These industries are known as oligopoly markets. Oligopoly markets are an example of imperfect competition. It consists of a market structure in which there is a small number of large firms in the industry hence is relatively highly concentrated. Barriers to entry and exit are also likely to exist. In oligopoly markets there is product differentiation, the extent of which depends on the type of product produced. This leads to interdependency, as the actions of one large firm will directly affect another large firm. Therefore, firms are said to be operating under conditions of uncertainty because firms are unable to judge the future actions of their competitors and hence their own firm’s future.

For example, if an oligopolist firm raises its prices,......

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Approximate Word Count: 698
Approximate Pages: 3 (250 words per double-spaced page)

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