1.5.5 Oligopoly — Practice Questions
Nine original multiple-choice questions on oligopoly, written to the style and difficulty of AQA Paper 3 Section A. Every question carries a full worked model answer.
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9 questions in this set
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1. The characteristic of oligopoly that most clearly distinguishes it from monopolistic competition is
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Answer: C (Interdependence between a few firms.). Both structures have differentiated products, but only oligopoly is dominated by a few large firms, each big enough for its decisions to matter to the others. That is what creates interdependence: before changing a price or launching a campaign, each firm must anticipate how its rivals will respond. Strategic behaviour of this kind is the defining feature of the market structure, and it is why game theory is used to analyse it.
Why the other options are wrong
- A — Products are differentiated in both structures, so this cannot separate them.
- B — Entry is restricted in oligopoly by high barriers such as economies of scale and brand loyalty. It is monopolistic competition that has free entry.
- D — Profit maximisation is the assumed objective across every market structure in the traditional theory of the firm.
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2. Table 1 shows annual sales in a market.
Using Table 1, the three-firm concentration ratio isTable 1: Annual sales by firm Firm Sales A £180m B £140m C £100m D £60m E £40m All other firms £80m Show model answer
Answer: B (70%). A concentration ratio is the combined share of the largest n firms, expressed as a percentage of total market sales.
Top three: £180m + £140m + £100m = £420m.
Total market: 180 + 140 + 100 + 60 + 40 + 80 = £600m.
Three-firm concentration ratio = 420 ÷ 600 × 100 = 70%.
A ratio this high indicates a concentrated market, and concentration of that order is typical of oligopoly.Why the other options are wrong
- A — 30% is firm A's share alone (180 ÷ 600). A three-firm ratio needs the top three combined.
- C — 80% is the four-firm ratio, adding firm D's £60m. Always check how many firms the question asks for.
- D — £420m is the combined sales of the top three, which is the numerator only. A concentration ratio is a percentage of the market total, not a money figure.
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3. A five-firm concentration ratio in an industry rises from 45% to 82%. All other things being equal, this indicates that the market has become
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Answer: D (More concentrated and less competitive.). A higher concentration ratio means a larger share of the market is held by the top firms, so the market is more concentrated. With sales channelled into fewer hands, each of those firms has more market power and the market is generally less competitive. A jump from 45% to 82% is substantial and would typically follow a wave of mergers or the exit of smaller rivals.
Why the other options are wrong
- A — A rising ratio means rising concentration. Both halves are the wrong way round.
- B — The concentration judgement is inverted: a higher ratio means more concentration, not less.
- C — Concentration is correctly identified, but more concentration normally means less competition, since fewer firms hold more of the market.
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4. Three airlines dominate a route. One considers cutting its fares but expects the others to match the cut within days, leaving market shares unchanged and all three worse off. This behaviour illustrates
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Answer: C (Interdependence, because each firm must anticipate its rivals' reactions.). The airline is not asking what a fare cut would do in isolation — it is asking what its rivals would do in response. That is interdependence, and it is the reason oligopolists are often reluctant to compete on price: a cut is matched, nobody gains share, and everyone's revenue falls. It explains why oligopolies frequently compete instead through advertising, loyalty schemes and service quality.
Why the other options are wrong
- A — Contestability concerns how easily new firms could enter. The reasoning here is about the three firms already on the route.
- B — Creative destruction is innovation displacing older products and firms. Nothing new is being introduced here.
- D — Price discrimination means charging different groups different prices for the same service. This is about a single fare change and the reaction to it.
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5. Two firms in an oligopoly secretly agree to raise their prices together and share the market between them. This is best described as
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Answer: A (Collusive behaviour, forming a cartel.). A secret agreement between rivals to fix prices or divide the market is collusion, and a group of firms operating such an agreement is a cartel. Colluding firms can behave collectively like a monopolist, restricting output and raising price above the competitive level. It is illegal in the UK and most other jurisdictions precisely because consumers bear the cost.
Why the other options are wrong
- B — Contestability is about the threat of entry disciplining incumbents. Colluding to raise prices works against that discipline rather than expressing it.
- C — Non-collusive behaviour means firms act independently while still anticipating rivals' reactions. Here they have made an explicit agreement, which is the opposite.
- D — Price discrimination is one firm charging different prices to different consumers. This is two firms coordinating a single higher price.
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6. Which one of the following would make collusion between firms in an oligopoly harder to sustain?
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Answer: D (Strong incentives for each firm to undercut.). A cartel is unstable from within. Once a high price has been agreed, each member can gain by quietly undercutting it and capturing extra sales while the others hold the line. Because every firm knows the others face the same temptation, agreements tend to break down. The other three options all make collusion easier: it is simpler to coordinate few firms, high barriers keep outsiders from undercutting the cartel, and similar costs mean the firms want a similar price.
Why the other options are wrong
- A — Fewer firms makes an agreement easier to reach and easier to police, so collusion is more likely rather than less.
- B — High barriers protect a cartel from new entrants who would otherwise be attracted by the high price and undercut it.
- C — Similar costs mean the firms' preferred prices are close together, so they can agree more readily. Very different costs make agreement harder.
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7. Supermarkets in an oligopoly compete mainly through loyalty schemes, advertising and store quality rather than by cutting prices. This is best described as
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Answer: C (Non-price competition.). Non-price competition is rivalry conducted through anything other than the price: advertising, branding, product quality, service, loyalty points, opening hours. It is characteristic of oligopoly because price cuts are so easily matched that they leave everyone worse off, whereas a distinctive brand or a better store is much harder for a rival to copy quickly.
Why the other options are wrong
- A — Allocative efficiency is a condition about resource allocation, where price equals marginal cost. It is not a form of competitive behaviour.
- B — Limit pricing means setting price low to deter entry. These firms are avoiding price competition rather than using price as a weapon.
- D — Predatory pricing means pricing below cost to force a rival out of the market. It is an aggressive use of price, not an alternative to it.
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8. A firm in a competitive oligopoly believes that if it raises its price, rivals will hold theirs steady, but if it cuts its price, rivals will match the cut. Sketching the demand curve this belief implies, the firm will most likely
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Answer: B (Keep its price unchanged, because either move reduces its revenue.). Sketch it in two halves, meeting at the current price.
Above the current price, rivals do not follow, so the firm loses a large share of its customers to them: demand is relatively elastic, and raising the price cuts revenue sharply.
Below it, rivals match immediately, so the firm gains few extra customers: demand is relatively inelastic, and cutting the price cuts revenue too.
The two segments produce a kink at the current price, and since both directions make the firm worse off, the rational move is to leave the price where it is. This is the standard explanation for why prices in some oligopolies are noticeably stable.Why the other options are wrong
- A — Below the current price demand is inelastic, because rivals match the cut. Quantity rises by proportionally less than price falls, so revenue drops.
- C — Above the current price demand is elastic, because rivals do not follow. A price rise would lose a disproportionate number of customers.
- D — MR = 0 is the revenue-maximising rule for a firm choosing output freely. The point of this model is that the firm's best move is not to move at all.
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9. A competition authority breaks up a long-standing cartel in an oligopolistic market. All other things being equal, the most likely consequences for consumers are
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Answer: D (Lower prices and a larger quantity traded.). A cartel behaves collectively like a monopolist: it restricts output and holds price above the competitive level. Once it is broken up, the firms compete independently again, so price falls and the quantity traded rises. Consumer surplus increases and the allocative inefficiency created by the cartel is reduced — which is precisely why competition authorities pursue them.
Why the other options are wrong
- A — This is what happens when a cartel is formed, not dismantled.
- B — Higher prices and higher quantity cannot occur together along an unchanged demand curve; buyers purchase less as price rises.
- C — Lower prices and lower quantity is equally inconsistent with the demand curve. As price falls, quantity demanded rises.