(a) Under perfect competition there are no barriers to entry and exit of firms into/from industry. When in short run there are abnormal profits, new firms enter. This will increase market supply and price will fall. This process continues till abnormal profits reduce to normal profits.

Similarly if firms are incurring losses, firms will start leaving. This reduces market supply and price will rise till losses are wiped out.

(b) As there are few firms in oligopoly, firms try to avoid price competition for the fear of price war. They use nonprice methods price like advertising, free gifts etc. to compete with others.

(a) Freedom of entry and exit to firms under perfect competition:

The industry is characterised by freedom of entry and exit of firms. In a perfectly competitive market, there are no barriers to entry or exit of firms. Implication : The implication of this assumption is that given sufficient time, all firms in the industry will be earning just normal profit. Suppose the existing firms are earning super normal profits. Attracted by the positive profits, the new firms enter the industry. The industry’s output, i.e., market supply goes up. The price comes down. New firms continue to enter till economic profits are reduced to zero. Now suppose the existing firms are incurring losses. The firms start leaving the industry. The industry’s output starts falling and price starts going up. All this continues till losses are wiped out. The remaining firms in the industry once again earn just the normal profits.

(b) Non-price competition under oligopoly:

When there are only a few firms they are normally afraid of competing with each other by lowering the price. It may start a price war and firm who starts the price war may ultimately lose. Thus, firms indulge in non-price competition in order to increase their shares in sales and profit. Under nonprice competition they mainly utilise publicity and selling techniques for increasing the sales of their product. Firms under oligopoly follow the policy of rigidity. Price rigidity refers to a situation in which price tends to stay fixed irrespective of changes in demand and supply conditions.