Oligopoly and Market Concentration: Interdependence, Kinked Demand Curve, Collusion, Cartels, Game Theory, Price Leadership, Concentration Ratios

1. An oligopoly is best described as a market structure with

A many firms selling identical products with no market power
B a few large firms that are mutually interdependent
C one firm protected by absolute barriers to entry
D many firms selling differentiated products with free entry

2. Interdependence in oligopoly means that each firm

A ignores rivals when setting price
B must consider the likely reactions of rival firms
C has no control over output
D faces a perfectly elastic demand curve

3. Which market is most likely to be oligopolistic?

A wheat farming with thousands of small producers
B local hairdressers with many independent firms
C commercial aircraft manufacturing dominated by a few large firms
D one government-owned water network

4. Which feature is most likely in oligopoly?

A perfect knowledge and identical products only
B strategic behaviour by firms
C absence of barriers to entry
D zero advertising expenditure

5. Market concentration refers to

A the extent to which market sales are dominated by a small number of firms
B the number of consumers in poverty
C the amount of tax revenue collected by government
D the rate of economic growth in an industry

6. A four-firm concentration ratio measures

A the combined market share of the four largest firms
B the combined fixed cost of four firms
C the average price charged by all firms
D the output of the smallest four firms only

7. If the four largest firms have market shares of 30%, 25%, 15% and 10%, the four-firm concentration ratio is

A 40%
B 55%
C 70%
D 80%

8. If an industry has a five-firm concentration ratio of 92%, the market is most likely

A perfectly competitive
B highly concentrated
C a pure monopsony
D completely unconcentrated

9. Which market structure is usually associated with a high concentration ratio?

A oligopoly
B perfect competition
C atomistic competition
D a market with no barriers to entry

10. A low concentration ratio most likely suggests

A many firms share the market
B one firm dominates the whole market
C collusion must exist
D entry is impossible

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. Which is the best example of non-collusive oligopoly?

A firms secretly agree to fix prices
B firms act independently but consider rivals’ reactions
C firms merge into one monopoly
D government fixes the price for all firms

12. Collusion occurs when firms

A compete aggressively by cutting prices repeatedly
B agree to restrict competition between themselves
C enter freely into a perfectly competitive market
D produce at minimum average cost automatically

13. A cartel is

A a formal agreement between firms to limit competition
B a firm with zero fixed costs
C a market with many price-taking firms
D a legal maximum price

14. Which is a common aim of a cartel?

A maximise joint profits by restricting output and raising price
B increase competition by cutting price to marginal cost
C make demand perfectly elastic
D remove all barriers to entry

15. A cartel is more likely to succeed when

A there are many firms and products differ greatly
B there are few firms and monitoring output is easier
C demand is perfectly elastic and barriers are low
D firms have no ability to restrict output

16. A cartel is more likely to break down when

A cheating is difficult to detect
B each firm can secretly increase output to gain more profit
C products are identical and firms are few
D firms face strong legal protection from investigation

17. Why does each cartel member have an incentive to cheat?

A by selling more at the cartel price, it may increase its own profit
B cheating always reduces its individual revenue
C cartel output quotas always maximise each firm’s independent profit
D cheating makes demand perfectly inelastic for rivals

18. Which condition makes collusion easier?

A few firms with similar costs
B many firms with very different costs
C no barriers to entry
D rapidly changing market conditions

19. Tacit collusion means firms

A make an explicit written agreement
B cooperate without a formal agreement
C compete only by lowering price
D cannot observe rivals’ prices

20. Explicit collusion means firms

A independently copy each other without communication
B make a direct agreement to reduce competition
C face perfect competition
D produce only public goods

21. Price fixing is

A an agreement among firms to set prices
B government measuring price inflation
C consumers choosing the lowest price
D a fall in price caused by excess supply

22. Market sharing occurs when firms agree to

A divide customers or geographical areas between themselves
B sell identical goods in perfect competition
C allow free entry
D set price equal to marginal cost

23. Output restriction by oligopolists is likely to

A raise price and increase joint profit if demand is not too elastic
B lower price and increase consumer surplus always
C eliminate all barriers to entry
D create perfect competition

24. Collusion is usually harmful to consumers because it may

A raise prices and reduce output
B lower prices to marginal cost
C increase consumer choice automatically
D remove all market power

25. Which is a possible benefit claimed for collusion?

A stable prices may reduce uncertainty for firms
B prices must always fall
C output always rises to the social optimum
D consumer surplus always increases

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

26. The kinked demand curve model explains

A price rigidity in oligopoly
B perfect competition in agriculture
C natural monopoly from falling LRAC
D monopoly price discrimination only

27. In the kinked demand curve model, if one firm raises price, rivals are expected to

A follow the price rise exactly
B not follow, causing the firm to lose many customers
C leave the market immediately
D raise output to zero

28. In the kinked demand curve model, if one firm cuts price, rivals are expected to

A ignore the price cut
B also cut price to protect market share
C raise their prices
D stop producing entirely

29. The demand curve above the kink is relatively elastic because

A rivals do not follow a price rise
B rivals follow a price rise immediately
C consumers have no substitutes
D the firm has no competitors

30. The demand curve below the kink is relatively inelastic because

A rivals match price cuts
B rivals ignore price cuts
C demand becomes perfectly elastic
D consumers stop buying the product

31. The kinked demand curve model suggests prices may remain stable because

A a price rise loses many customers, while a price cut may not gain many customers
B all firms are price takers
C firms cannot change output
D marginal cost never changes

32. In the kinked demand curve model, marginal revenue has

A a discontinuity or gap
B a perfectly horizontal shape at all outputs
C no relationship with demand
D the same shape as average cost

33. Price rigidity can continue even if marginal cost changes within the MR gap because

A profit-maximising output and price may remain unchanged
B demand becomes upward sloping
C firms stop maximising profit
D price must equal average cost

34. Which event is most likely to cause a price war?

A one oligopolist cuts price and rivals retaliate with further cuts
B all firms agree to restrict output
C firms sign a legal cartel agreement
D government raises barriers to entry

35. A price war may harm oligopolists because

A lower prices can reduce profits for all firms
B demand always becomes perfectly inelastic
C consumers stop buying at lower prices
D costs become zero

36. Which is most likely to be a form of non-price competition in oligopoly?

A product innovation and advertising
B secret price fixing
C setting price below AVC forever
D increasing price after rivals do not follow

37. Oligopolists often prefer non-price competition because

A price cuts may trigger retaliation and reduce profits
B advertising is illegal
C non-price competition removes all costs
D product differentiation makes demand perfectly elastic

38. Game theory is useful in oligopoly because firms’ profits depend on

A only their own costs, never rivals’ actions
B their own decisions and rivals’ decisions
C government spending only
D household income only

39. A dominant strategy is a strategy that

A gives the best outcome regardless of what the rival does
B gives the worst outcome if rivals cooperate
C is chosen only when firms have no rivals
D means price must equal marginal cost

40. A Nash equilibrium occurs when

A each firm is choosing the best strategy given the other firm’s strategy
B all firms earn zero revenue
C every firm regrets its decision after rivals move
D no firm considers rival behaviour

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. In a prisoner’s dilemma, firms may fail to cooperate because

A each firm has an incentive to cheat even though joint cooperation would be better
B cooperation always gives each firm the highest individual payoff whatever the rival does
C firms have perfect trust and enforceable contracts
D there are no strategic choices

42. Two firms can either keep price high or cut price. If both keep price high, both earn $10m. If one cuts while the other keeps high price, the cutter earns $15m and the other earns $2m. If both cut, both earn $5m. What is the likely Nash equilibrium if both act independently?

A both keep price high
B both cut price
C one keeps high price and the other always accepts low profit
D both leave the market

43. Using the same payoff structure, why is “both keep price high” unstable without enforcement?

A each firm can gain by cutting price if the other keeps price high
B both firms earn losses at high price
C cutting price gives zero profit to both firms
D price cannot be changed in oligopoly

44. Price leadership occurs when

A one firm sets the price and others follow
B every firm sets a different price secretly
C consumers decide the market price directly
D firms become price takers

45. Barometric price leadership occurs when

A a firm seen as a reliable market indicator changes price and others follow
B the smallest firm forces all rivals to exit
C government measures air pressure before setting price
D every firm charges below marginal cost

46. Dominant firm price leadership occurs when

A the largest firm sets the price and smaller firms follow
B all firms have exactly equal market share
C firms cannot observe prices
D entry is completely free and instant

47. Which is a risk of price leadership?

A it may be investigated as tacit collusion
B it always creates perfect competition
C it removes all market power
D it guarantees allocative efficiency

48. Which behaviour is most likely to be predatory pricing?

A setting very low prices temporarily to force rivals out
B raising price because costs rise
C charging different prices due to different transport costs
D setting price equal to average cost forever

49. Which chain best explains oligopoly interdependence?

A few large firms → each firm’s action affects rivals → rivals react → strategic behaviour
B many tiny firms → no firm affects price → no reaction → price taking
C one firm only → no rivals → perfect interdependence
D no barriers → instant entry → permanent supernormal profit

50. Which chain best explains cartel instability?

A cartel sets high price → each firm can gain by secretly selling more → cheating spreads → cartel breaks down
B cartel sets low price → consumers leave market → monopoly forms automatically
C cartel removes all incentives to cheat → firms always obey quotas
D cartel creates perfect competition → price equals marginal cost

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

1. Answer: B

A wrong: many firms selling identical products with no market power describes perfect competition.
B correct: oligopoly means a few large firms dominate and each firm’s decisions affect rivals.
C wrong: one firm with absolute barriers is monopoly.
D wrong: many firms selling differentiated products with free entry describes monopolistic competition.

2. Answer: B

A wrong: ignoring rivals is unrealistic in oligopoly.
B correct: interdependence means each firm must consider how rivals may react to price, output or advertising decisions.
C wrong: oligopolists usually have some control over output.
D wrong: perfectly elastic demand is more linked to perfect competition.

3. Answer: C

A wrong: wheat farming with many small producers is closer to perfect competition.
B wrong: local hairdressers with many firms are closer to monopolistic competition.
C correct: commercial aircraft manufacturing is dominated by a few huge firms, so oligopoly fits.
D wrong: one water network is natural monopoly.

4. Answer: B

A wrong: oligopoly may have differentiated or homogeneous products, but not perfect-knowledge identical-only conditions.
B correct: oligopoly involves strategic behaviour because firms react to each other.
C wrong: oligopoly usually has barriers to entry.
D wrong: advertising is often heavy in oligopoly.

5. Answer: A

A correct: market concentration measures how much of total market sales are controlled by a small number of firms.
B wrong: poverty is income distribution/living standards.
C wrong: tax revenue is government finance.
D wrong: economic growth is output change.

6. Answer: A

A correct: four-firm concentration ratio adds the market shares of the four largest firms.
B wrong: it is not about fixed costs.
C wrong: it does not measure average price.
D wrong: it measures largest firms, not smallest firms.

7. Answer: D

A wrong: 40% adds only two firms incorrectly.
B wrong: 55% excludes some top firms.
C wrong: 70% excludes the fourth firm.
D correct: 30 + 25 + 15 + 10 = 80%.

8. Answer: B

A wrong: perfect competition would have a very low concentration ratio.
B correct: 92% controlled by five firms shows high concentration.
C wrong: monopsony means one buyer, not seller concentration.
D wrong: 92% is highly concentrated, not unconcentrated.

9. Answer: A

A correct: oligopoly usually has a few large firms and a high concentration ratio.
B wrong: perfect competition has low concentration.
C wrong: atomistic competition has many tiny firms.
D wrong: no barriers usually reduce concentration.

10. Answer: A

A correct: low concentration means market share is spread across many firms.
B wrong: one dominant firm would create high concentration.
C wrong: collusion is not guaranteed.
D wrong: impossible entry usually raises concentration.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. Answer: B

A wrong: secret price fixing is collusion.
B correct: non-collusive oligopoly means firms act separately but strategically consider rivals.
C wrong: merging into one monopoly removes oligopoly.
D wrong: government price fixing is regulation.

12. Answer: B

A wrong: aggressive price cutting is competition or price war.
B correct: collusion means firms agree to reduce competition, often by fixing prices or output.
C wrong: free entry into perfect competition is opposite to collusion.
D wrong: minimum AC is productive efficiency.

13. Answer: A

A correct: a cartel is a formal agreement between firms to limit competition.
B wrong: fixed costs are unrelated.
C wrong: many price-taking firms describe perfect competition.
D wrong: legal maximum price is price control.

14. Answer: A

A correct: cartels restrict output and raise price to increase joint profits.
B wrong: price = MC would be competitive/allocatively efficient.
C wrong: demand elasticity is not made perfectly elastic.
D wrong: cartels usually rely on barriers or control, not free entry.

15. Answer: B

A wrong: many firms and differentiated products make coordination harder.
B correct: few firms and easier monitoring reduce cheating and make cartels more stable.
C wrong: perfectly elastic demand and low barriers weaken cartel power.
D wrong: cartels need ability to restrict output.

16. Answer: B

A wrong: cheating being difficult to detect makes breakdown more likely, but the option wording says “when cheating is difficult to detect” as a condition; still, the direct breakdown reason is firms secretly increasing output.
B correct: each firm has an incentive to sell more secretly at the high cartel price, undermining the agreement.
C wrong: few firms and identical products make collusion easier.
D wrong: legal protection from investigation would strengthen collusion.

17. Answer: A

A correct: if a cartel keeps price high, an individual firm can gain by secretly selling extra output.
B wrong: cheating can increase individual revenue.
C wrong: cartel quotas maximise joint profit, not necessarily each firm’s independent profit.
D wrong: cheating does not make rivals’ demand perfectly inelastic.

18. Answer: A

A correct: few firms with similar costs find it easier to agree and monitor behaviour.
B wrong: many firms with different costs make agreement difficult.
C wrong: no barriers allow entrants to break the cartel.
D wrong: rapidly changing conditions make agreements unstable.

19. Answer: B

A wrong: explicit written agreement is explicit collusion.
B correct: tacit collusion means firms coordinate without formal direct agreement.
C wrong: only price cutting is competition, not collusion.
D wrong: observing rivals helps tacit collusion.

20. Answer: B

A wrong: independently copying without communication is tacit behaviour.
B correct: explicit collusion is a direct agreement, often illegal, to restrict competition.
C wrong: perfect competition has no collusion.
D wrong: public goods are unrelated.

21. Answer: A

A correct: price fixing is an agreement to set prices.
B wrong: inflation measurement is done by price indices.
C wrong: consumers choosing lowest price is market behaviour.
D wrong: excess supply causing price fall is market adjustment.

22. Answer: A

A correct: market sharing means firms divide areas or customers to avoid competition.
B wrong: perfect competition does not involve market sharing.
C wrong: free entry weakens collusion.
D wrong: P = MC is allocative efficiency.

23. Answer: A

A correct: restricting output can raise price and joint profit when demand is not very elastic.
B wrong: output restriction tends to reduce consumer surplus.
C wrong: barriers are not eliminated.
D wrong: collusion reduces competition.

24. Answer: A

A correct: collusion often raises prices, restricts output and reduces consumer welfare.
B wrong: lowering price to MC is competitive efficiency.
C wrong: collusion may reduce choice.
D wrong: collusion increases market power.

25. Answer: A

A correct: firms may argue collusion stabilises prices and reduces uncertainty.
B wrong: prices usually rise, not always fall.
C wrong: output often falls below social optimum.
D wrong: consumer surplus usually falls.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

26. Answer: A

A correct: the kinked demand curve explains price rigidity in oligopoly.
B wrong: agriculture with many firms is closer to perfect competition.
C wrong: natural monopoly comes from falling LRAC.
D wrong: price discrimination is monopoly pricing strategy.

27. Answer: B

A wrong: if rivals followed price rises, demand above the kink would be less elastic.
B correct: rivals are expected not to follow a price rise, so the firm loses many customers.
C wrong: rivals do not leave immediately.
D wrong: “raise output to zero” is nonsense.

28. Answer: B

A wrong: if rivals ignored a price cut, the firm would gain many customers.
B correct: rivals match price cuts to protect market share.
C wrong: raising prices would lose customers.
D wrong: rivals do not stop producing.

29. Answer: A

A correct: above the kink, rivals do not follow price rises, so customers switch away and demand is elastic.
B wrong: if rivals followed, fewer customers would be lost.
C wrong: substitutes exist through rival firms.
D wrong: oligopolists have competitors.

30. Answer: A

A correct: below the kink, rivals match price cuts, so the firm gains few extra customers.
B wrong: if rivals ignored cuts, demand would be elastic.
C wrong: demand does not become perfectly elastic.
D wrong: consumers do not stop buying.

31. Answer: A

A correct: raising price loses many customers, cutting price gains few, so firms avoid changing price.
B wrong: oligopolists are not price takers.
C wrong: firms can change output.
D wrong: MC can change; price may still remain stable.

32. Answer: A

A correct: the kink creates a discontinuous MR curve with a gap.
B wrong: horizontal MR is linked to perfect competition.
C wrong: MR is derived from demand/AR.
D wrong: MR is not shaped like average cost.

33. Answer: A

A correct: if MC changes within the MR gap, the MR = MC output and price may remain unchanged.
B wrong: demand does not become upward sloping.
C wrong: firms still aim to maximise profit.
D wrong: price does not need to equal AC.

34. Answer: A

A correct: a price cut by one firm may trigger rival price cuts, causing a price war.
B wrong: output restriction is collusion.
C wrong: cartel agreement is collusion, not price war.
D wrong: higher barriers do not directly cause price war.

35. Answer: A

A correct: repeated price cuts reduce prices and can reduce profits for all firms.
B wrong: demand does not always become perfectly inelastic.
C wrong: consumers usually buy more at lower prices.
D wrong: costs do not become zero.

36. Answer: A

A correct: product innovation and advertising are non-price competition.
B wrong: secret price fixing is collusion.
C wrong: pricing below AVC is predatory pricing.
D wrong: increasing price is price competition/pricing behaviour.

37. Answer: A

A correct: price cuts can cause retaliation, so firms often compete through advertising, branding and product development.
B wrong: advertising is not generally illegal.
C wrong: non-price competition still has costs.
D wrong: differentiation usually makes demand less elastic, not perfectly elastic.

38. Answer: B

A wrong: rivals’ actions matter greatly.
B correct: game theory studies strategic situations where each firm’s payoff depends on its own and rivals’ choices.
C wrong: government spending is not the focus.
D wrong: household income is not the strategic interaction.

39. Answer: A

A correct: a dominant strategy is best no matter what the rival chooses.
B wrong: it is not the worst outcome.
C wrong: dominant strategies occur when rivals exist.
D wrong: it does not mean P = MC.

40. Answer: A

A correct: Nash equilibrium occurs when each firm is doing the best it can given the rival’s strategy.
B wrong: firms can earn positive revenue.
C wrong: if each is best-responding, no firm wants to change unilaterally.
D wrong: oligopoly firms consider rival behaviour.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. Answer: A

A correct: prisoner’s dilemma shows firms may cheat even though mutual cooperation gives a better joint outcome.
B wrong: if cooperation were always individually best, there would be no dilemma.
C wrong: perfect trust/enforcement would support cooperation.
D wrong: strategic choices are central.

42. Answer: B

A wrong: if both keep price high, each can improve by cutting and earning $15m.
B correct: cutting price is the dominant strategy for both, so both cut and earn $5m each.
C wrong: no firm would passively accept low profit if it can choose.
D wrong: leaving the market is not one of the choices.

43. Answer: A

A correct: if one firm expects the other to keep price high, it can earn $15m by cutting.
B wrong: both earn $10m at high price, not losses.
C wrong: if both cut, each earns $5m, not zero.
D wrong: oligopolists can change price.

44. Answer: A

A correct: price leadership is when one firm sets price and others follow.
B wrong: every firm setting different prices is not price leadership.
C wrong: consumers influence demand but do not directly set firm price.
D wrong: oligopolists are not price takers.

45. Answer: A

A correct: barometric price leadership occurs when firms follow a firm seen as accurately reading market conditions.
B wrong: smallest firm forcing exit is not barometric leadership.
C wrong: “barometric” is not literal air pressure pricing.
D wrong: charging below MC is not price leadership.

46. Answer: A

A correct: dominant firm price leadership means the largest/most powerful firm sets price and others follow.
B wrong: equal market shares do not create dominant firm leadership.
C wrong: prices must be observable.
D wrong: instant free entry weakens dominance.

47. Answer: A

A correct: price leadership can resemble tacit collusion and may attract regulator investigation.
B wrong: it does not create perfect competition.
C wrong: it may strengthen market power.
D wrong: it does not guarantee P = MC.

48. Answer: A

A correct: predatory pricing means temporarily setting very low prices to drive rivals out and later raise prices.
B wrong: cost-based price rise is normal pricing.
C wrong: transport-cost differences are not predatory pricing.
D wrong: AC pricing is break-even pricing.

49. Answer: A

A correct: oligopoly has few large firms, so actions affect rivals, triggering reactions and strategic behaviour.
B wrong: many tiny firms describes perfect competition.
C wrong: one firm has no rivals, so no mutual interdependence.
D wrong: no barriers and instant entry prevent permanent supernormal profit.

50. Answer: A

A correct: high cartel price gives each firm incentive to secretly sell more; cheating spreads and cartel collapses.
B wrong: cartels usually set high, not low, prices.
C wrong: cartels have strong incentives to cheat.
D wrong: cartels reduce competition; they do not create perfect competition.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.