In an oligopolistic competition, how do firms typically react to pricing?

In oligopolistic competition, firms are heavily interdependent, meaning the actions of one firm can significantly impact the others. This interdependence leads firms to adjust prices strategically to maintain a stable competitive environment. Firms are aware that drastic price changes can trigger reactions from competitors, leading to potential price wars or instability in the market. Therefore, they often prefer to keep prices stable, using other means such as advertising or product differentiation to compete instead.

This approach helps firms avoid engaging in aggressive price competition that could erode profit margins and lead to unpredictable outcomes. By carefully adjusting prices as a reaction to competitors while striving for stability, firms can ensure they remain competitive without threatening their own profitability or market position.