Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What describes an oligopoly?

1. A market with numerous independent firms

2. A market dominated by a few firms with significant influence

3. A situation where firms are price takers

4. A single firm controlling the entire market

The correct answer is: A market dominated by a few firms with significant influence

An oligopoly is characterized by a market structure where a small number of firms dominate the market, meaning these firms have considerable influence over the market conditions, prices, and output levels. In an oligopolistic market, the actions of one firm can significantly impact the others due to the interdependent nature of their performance and strategies. This leads to a few firms collectively holding market power, allowing them to engage in practices such as price-setting or establishing market shares that could affect competition and consumer choices. In this context, the other options represent different market structures: - A market with numerous independent firms typically describes perfect competition, where no single firm can influence the market price. - A situation where firms are price takers aligns with perfect competition as well, where the individual firms accept the market price established by supply and demand. - A single firm controlling the entire market illustrates a monopoly, where one firm dominates the market and can set prices without competition. Thus, the description of an oligopoly as being dominated by a few firms with significant influence is accurate, reflecting the distinctive characteristics that set it apart from other market structures.