What is the condition for the equilibrium of a firm under oligopoly?

Question

Accepted Answer

The correct option is 1:

The fundamental condition for profit maximization and, therefore, equilibrium for any firm—regardless of the market structure (monopoly, perfect competition, monopolistic competition, or oligopoly)—is that Marginal Revenue (MR) must equal Marginal Cost (MC), and MC must be rising. Marginal Revenue is the additional revenue gained from selling one more unit, and Marginal Cost is the additional cost incurred from producing one more unit. By setting MR = MC, the firm ensures that the last unit produced added exactly as much to revenue as it did to cost, thereby maximizing the total profit (or minimizing loss). While oligopoly has complex dynamics like interdependence, price rigidity (as seen in the kinked demand curve model), and strategic behavior, the underlying principle of maximizing profit remains constant across all market forms.

The incorrect option is 2:

P = MC (Price equals Marginal Cost) is the equilibrium condition specific to a firm in a perfectly competitive market. In oligopoly, firms are price makers (or setters) to some degree, meaning the demand curve is downward sloping and AR > MR. Therefore, P (which equals AR) is generally greater than MR, making P = MC an incorrect equilibrium condition for an oligopolistic firm.

The incorrect option is 3:

P = MR (Price equals Marginal Revenue) is only true in perfect competition, where the firm is a price taker. In oligopoly, as the firm must lower its price to sell more output, the Average Revenue (P) curve is separate from and lies above the Marginal Revenue (MR) curve, meaning P > MR. Thus, this cannot be the equilibrium condition.

The incorrect option is 4:

MR = AC (Marginal Revenue equals Average Cost) is the condition for normal profit (or zero economic profit) but is not the primary condition for *equilibrium* or profit maximization. While a firm may reach an equilibrium where MR = MC and MR also happens to equal AC (break-even point), MR = MC is the necessary and sufficient condition for output determination.