How do firms in an oligopoly typically compete?

In an oligopoly, a market structure characterized by a small number of firms that dominate the market, competition typically occurs through strategic interactions among the firms. These firms are interdependent, meaning that the actions of one firm directly impact the decisions made by others.

Strategic competition in an oligopoly involves firms considering their rivals' potential reactions when making decisions such as pricing, output levels, or product improvements. For instance, if one firm decides to lower its prices, others may need to follow suit to remain competitive, which could lead to price wars that are detrimental to all. Conversely, firms might choose to engage in non-price competition, such as advertising or enhancing product features, to attract customers without necessarily lowering prices.

This strategic interaction leads to various outcomes such as collusion, where firms may agree on prices or market shares, thereby reducing competition and increasing collective profits. Understanding these dynamics is crucial for analyzing how firms operate within an oligopolistic market and the resulting implications for market behavior and consumer choices.

The other options do not accurately reflect the nature of competition in an oligopoly. Reducing prices significantly would not be a sustainable strategy due to the risk of price wars, while ignoring each other does not apply as firms are keenly aware of