Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What best describes an oligopoly?

1. A market with multiple producers and no influence

2. A market dominated by several firms with high influence

3. A market with only two firms

4. A market with only one producer

The correct answer is: A market dominated by several firms with high influence

An oligopoly is best described as a market structure dominated by a small number of firms that have significant influence over the market. In such a market, the actions of one firm can affect the decisions and strategies of the others, leading to interdependent behavior. Firms in an oligopoly tend to offer similar products or services and work together to some extent, which can lead to collusion or price-fixing arrangements. This high degree of influence distinguishes oligopolies from other market structures, such as perfect competition, where no single firm can influence market conditions. The presence of several dominant firms in an oligopoly typically results in reduced competition compared to a competitive market, but more competition than in a monopoly, where a single producer controls the entire market. Here, the presence of just a few firms means that each actively monitors and reacts to the marketing strategies and pricing of the others, further illustrating the cooperative rather than purely competitive nature of oligopolistic markets.