How does product differentiation benefit firms in an oligopoly?

Product differentiation benefits firms in an oligopoly primarily by creating a unique identity that can attract customers. In an oligopolistic market, a small number of firms dominate, and each firm is aware of the actions of its competitors. By differentiating their products—whether through quality, features, branding, or other attributes—firms can carve out a distinct position in the market. This differentiation allows them to appeal to specific consumer preferences and foster brand loyalty, enabling them to stand out in a competitive landscape.

When firms successfully differentiate their products, they can attract customers who may prefer their specific offerings over those of competitors. This can lead to increased market share and higher pricing power, as consumers are willing to pay a premium for perceived unique benefits. In turn, this can help firms maintain profitability even in a competitive setting, where price competition may not be the sole factor influencing consumer choices.

The other options do not accurately depict the main advantages of product differentiation in an oligopoly. Lowering prices dramatically is typically not a sustainable competitive strategy in an oligopoly due to mutual interdependence among firms. Decreased competition is less likely, as differentiation can actually foster competition based on non-price factors. Lastly, product differentiation is quite relevant to consumer choice, as it helps