...OLIGOPOLY An oligopoly is a market structure in which a few firms dominate. When a market is shared between a few firms, it is said to be highly concentrated. Although only a few firms dominate, it is possible that many small firms may also operate in the market. Concentration ratios Oligopolies may be identified using concentration ratios, which measure the proportion of total market share controlled by a given number of firms. When there is a high concentration ratio in an industry, economists tend to identify the industry as an oligopoly. Characteristics 1.) There are few competing sellers but they are too large in the size of a giant company. 2.) Products are homogenous, others are differentiated. 3.) Entry of new firms can be very difficult. 4.) There is mutual interdependence among firms in the market 5.) Demand curve for oligopoly is kinked demand curve. Examples - Gasoline, cement, sugar and telecommunication are examples of products of homogenous oligopoly. - Cars and machines are products of differentiated oligopoly. - Oil and telecommunication (Globe, Smart, Sun Cellular) companies are examples of firms operating in an oligopolistic environment. Demand Curve KINKED DEMAND CURVE If the assumptions hold then: • The firm's marginal revenue curve is discontinuous (or rather, not differentiable), and has a gap at the kink • For prices above the prevailing price the curve is relatively elastic • For prices below the point the curve is relatively...
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...and will discuss the consequences of their behaviour. As well, I will try to examine the statement "being an oligopolist is not easy", and whether it is true or whether the truth lies in between. Aspects of Market Structure The four types of market structure are listed in the drawing below: Characteristics of an oligopoly Definition Oligopoly is a type of imperfect competition with a market structure, that has only a small group of sellers which offers similar or even identical products. Oligopolist, Oligopoly An oligopoly is a market form in which a market is dominated by a small number of sellers (oligopolists). There are few participants in this type of market and each oligopolist is aware of the actions of the others. Oligopolistic markets are characterised by interactivity. The decisions of one firm influence and are influenced by the decisions of other firms. The question is how we can describe the market situation of an Oligopolist. If we compare it to the other possibilities of a market situation such as a competitive market or a monopolistic market, it is neither of them. The typical characteristics of an oligopoly is that each of the market players offer a product similar or identical to the others in a competitive market. This fact distinguishes the market structure from a monopolistic competition where the firms are similar but not identical. On the other side, there exists more than one player in this kind of market what makes...
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...OLIGOPOLY AND MONOPOLISTIC COMPETITION Up to now, we have covered two extreme types of markets. We covered perfect competition with the highest degree of competition, then we covered monopoly with the lowest degree of competition. Now, we will cover oligopoly and monopolistic competition. These two market types are in between two extremes: they show some features of competition and some features of monopoly. Oligopoly Definition: Oligopoly is a market structure in which there are a few sellers and they sell almost identical products. There are barriers to entry in oligopoly. Oligopoly is characterized by the tension between cooperation and self- interest among these sellers. For example, if the oligopolist firms can cooperate, they can charge a high price and share profits. But if they cannot cooperate and instead they compete because of following their own self-interest, then price goes down and profits decline. We will give examples of this later. Oligopoly Examples: crude oil (Kuwait, Iraq, Saudi Arabia, Venezuela, Kazakhstan, Azerbeijan) , coke (Coca Cola, Pepsi, Cola Turka), GSM providers (Turkcell, Vodafone, Avea), inter-city bus transportation (between Istanbul & Denizli: Varan, Ulusoy, Pamukkale, Köseoğlu), airline travel (between Istanbul and Frankfurt: Turkish Airlines, Pegasus, …) etc. Monopolistic Competition Definition: Many firms sell products that are similar but not identical. There is free entry and exit like perfect competition. But at the same time, there is...
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...Oligopoly * An oligopoly is a form of industry (market) structure characterized by a few dominant firms. Products may be homogeneous or differentiated. * The behavior of any one firm in an oligopoly depends to a great extent on the behavior of others Oligopoly Models * All kinds of oligopoly have one thing in common: * The behavior of any given oligopolistic firm depends on the behavior of the other firms in the industry comprising the oligopoly. The Collusion Model * A group of firms that gets together and makes price and output decisions jointly is called a cartel. * Collusion occurs when price- and quantity-fixing agreements are explicit. * Tacit collusion occurs when firms end up fixing price without a specific agreement, or when agreements are implicit. The Cournot Model * The Cournot model is a model of a two-firm industry (duopoly) in which a series of output-adjustment decisions leads to a final level of output between the output that would prevail if the market were organized competitively and the output that would be set by a monopoly. The Kinked Demand Curve Model * The kinked demand model is a model of oligopoly in which the demand curve facing each individual firm has a “kink” in it. The kink follows from the assumption that competitive firms will follow if a single firm cuts price but will not follow if a single firm raises price. The Kinked Demand Curve Model * Above P*, an increase in price...
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...Oligopoly in business can be described as when few firms between them share a large proportion of the industry. In the essay I will examine the economics literature on tacit collusion in oligopoly and why firms are tempted to collude. I will provide benefit of collusion and legal literature regarding collusion. Some of the best know companies are oligopolists, including Coca-Cola, Pepsi, British Airways, and Virgin Atlantic Airways. There are however, significant difference in the structure of industries under oligopoly, and similar significant difference in the behaviour of firms. The firms may also produce a virtually identical product. Most oligopolists produce differentiated products such as (e.g. cars, drinks). Much of the competition between such oligopolists is in term of the marketing of their particular brands (Sloman, Hinde, Garratt: 2010). Despite the difference between oligopolies, there are two crucial features that distinguish oligopoly from other market structures. There are various barriers to the entry of new firms because it requires a lot of capital to start, however entry barriers vary from industry to industry. Also, because there are only few firms under oligopoly, each firm will have to take into account of the others; this means that they are mutually dependent. Oligopolies do not compete on prices. Price wars tend to lead to lower profits, leaving a little change to market shares. Furthermore, Oligopolies firms tend to charge reasonably premium prices...
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...Oligopoly is a market structure in which a few firm dominate the industry, it is an industry with a 5 firm concentration ratio of greater than 50%. In Oligopoly, firms are interdependent; this means their decisions (price and output) depend upon how the other firms behave: •Barriers to entry are likely to be a feature of Oligopoly •There are different models to explain how firms may behave The kinked demand curve model suggest firms will be profit maxi misers. Kinked Demand Curve Diagram kinked At p1 if firms increased their price, consumers would buy from the other firms therefore they would lose a large share of the market and demand will be elastic. Therefore, firms will lose revenue from increasing price If Firms cut Price then they would gain a big increase in Market share, however it is unlikely that firms will allow this. Therefore, other firms follow suit and cut price as well. Therefor,e demand will only increase by a small amount: Demand is inelastic for a price cut and revenue would fall. This model suggests price will be rigid because there is no incentive for firms to change the price If prices are rigid and firms have little incentive to change prices they will concentrate on non price competition. This occurs when firms seek to increase revenue and sales by various methods other than price. For example, a firm could spend money on advertising to raise the profile of their product and try and increase brand loyalty, if successful...
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...intensity of competition that prevails between firms in it. (Chris Mulhearn et al 2001: 98) There are three major market structures: perfect competition, monopoly and oligopoly. Perfect competition is the ideal type of market structure which allows a large number of small firms producing homogeneous product to maximise the profit. Monopoly is a market structure in which there is a sole firm of a good or service that has no close substitutes and for which there are barriers to entry into the industry. Oligopoly can be defined as which a market is dominated by a small number of firms and each firm can affect the market price. One of the examples is airlines companies. Unlike other market structures, firms act interpedently in an oligopolistic market. For instance, each time a firm makes a price or output decision to the market, others competitors are likely to react to the changes either legally or illegally in the industry. Hence, oligopoly can be divided into two different types, non-collusive oligopoly and collusive oligopoly. Non-collusive oligopoly means where firms are working independently and competing properly. In contrast, collusive oligopoly occurs when firms start working together privately and illegally to control the market. Cartel and price leadership are the two most common examples of collusive oligopolies. Cartel is a clear agreement between a group of companies which get together to make decisions upon the prices and market shares. Cartels usually happen in an...
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...THE IIS UNIVERSITY JAIPUR Indian Airlines- an oligopoly INDEX ACKNOWLEDGEMENT WHAT IS OLIGOPOLY? An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). Oligopolies can result from various forms of collusion which reduce competition and lead to higher prices for consumers. Oligopoly has its own market structure.[1] With few sellers, each oligopolist is likely to be aware of the actions of the others. According to game theory, the decisions of one firm therefore influence and are influenced by decisions of other firms. Strategic planning by oligopolists needs to take into account the likely responses of the other market participants. The major characteristics of a market proving it to be an oligopoly are:- 1. Profit maximization conditions An oligopoly maximizes profits. 2. Ability to set price Oligopolies are price setters rather than price takers. 3. Entry and exit Barriers to entry are high. The most important barriers are government licenses, economies of scale, patents, access to expensive and complex technology, and strategic actions by incumbent firms designed to discourage or destroy nascent firms. Additional sources of barriers to entry often result from government regulation favoring existing firms making it difficult for new firms to enter the market. 4. Number of firms "Few" – a "handful" of sellers.[3] There are so few firms that the actions of one firm can influence...
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...Industry A Concentration ratios are used to measure the extent of competition in an industry by looking at the total output produced by the largest firms. Although there are several measures in the literature, generally the biggest four and biggest eight firms are considered (Cabral, 2000). A low concentration ratio is regarded as an industry with more competition and firms have very low control. The low concentration can be from 0 to 50 per cent and the industry can have a structure ranging from perfect competition to oligopoly. Since in industry A there are 20 firms and the CR is 20 per cent, it can be deemed as a low ratio. Therefore, the industry is a perfectly competitive one with a lot of firms competing with each other, and no one firm controls a big chunk of the market. A perfectly competitive industry has many buyers and many sellers, also the products are quite standard and resemble to each other (Microeconomics: The Basics). The number of sellers makes it impossible for any single firm to control the market and the price is determined by the demand and supply conditions. Since the products are very similar or identical to each other, the buyers can switch from one good or service to another when there are price differentials. Additionally, the barriers to entry and exit are quite low; hence firms can easily enter and leave the industry. As a result of all these features, the economic profits are zero and maximum efficiency is achieved. Nevertheless, the pure perfect...
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...is simply the area of the shaded rectangle. An oligopoly is a market dominated by a few producers. The market can be international, national, or local. The main characteristic of an oligopoly is that they have pricing power. However, unlike a monopoly that consists of a single firm dominating the market, an oligopolistic firm must take into consideration how the other producers will react to any changes in price. It is this mutual interdependence of the few firms producing the product that make an oligopoly different from a monopoly. Sometimes, an oligopoly will try to increase its market power by forming a cartel, which is a group of firms acting in unison. An oligopolistic firm is generally a large firm that had to invest a lot of capital to produce the product, such as aircraft, cars, and household appliances. This large initial investment of capital is often a major barrier to entry to oligopolistic markets. Other barriers to entry include patents, control of strategic resources, and the ability to engage in retaliatory pricing to prevent firms from entering the market. An oligopoly produces products that exhibit large economies of scale, where the cost of producing each unit declines with large quantities. Such economies of scale prevent other firms from entering the market, since there would be little market share that could be gained, and what could be gained would not be enough to be profitable. An oligopoly can produce either...
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...Running head: Oligopoly Theory The Oligopoly Theory OPERATIONS MANAGEMENT Table of Contents Abstract…………………………………………………………………………………………3 Introduction…………………………………………………………………………………….4 Oligopolistic Competition……………………………………………………………………...5 Characteristics of an Oligopoly…..………………………………….………………………....6 Models of Oligopoly Behavior…………………………………………………………………9 Conclusion….………..………………………………………………………………………...11 References……………………………………………………………………………………..12 Abstract The goal of this research paper is to provide an overview of the theory of oligopoly and its effect on the global economic stage. We will review what results when there are fewer companies in a particular marketplace. We will also review the various barriers commonplace to oligopolies. Finally, we will address the various theories of oligopoly and their application in the global economy. Introduction There are four basic kinds of market constructs; monopoly perfect competition, oligopoly, and monopolistic competition. This paper will review the market structure known as oligopoly. The term oligopoly can be defined as a type of market structure that has a small number of participants that offer a particular product or service within the marketplace (Salvatore, 2007). The etymology of the word oligopoly is cryptic except for its initial appearance in 1518 in...
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...OLIGOPOLY, CHARACTERISTICS: The three most important characteristics of oligopoly are: (1) an industry dominated by a small number of large firms, (2) firms sell either identical or differentiated products, and (3) the industry has significant barriers to entry. These three characteristics underlie common oligopolistic behavior, including interdependent actions and decision making, the inclination to keep prices rigid, the pursuit of nonprice competition rather than price competition, the tendency for firms to merge, and the incentive to form collusive arrangements. Small Number of Large Firms The most important characteristic of oligopoly is an industry dominated by a small number of large firms, each of which is relatively large compared to the overall size of the market. This characteristics gives each of the relatively large firms substantial market control. While each firm does not have as much market control as monopoly, it definitely has more than a monopolistically competitive firm. The total number of firms in an oligopolistic industry is not the key consideration. A oligopoly firm actually can have a large number of firms, approaching that of any monopolistically competitive industry. However, the distinguishing feature is that a few of the firms are relatively large compared to the overall market. A given industry with a thousand firms, for example, is considered oligopolistic if the top five firms produce half of the industry's total output. The hypothetical...
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...The concept of oligopolies aren’t new they have been around since the beginning of trade. Never before now have the oligopolistic competition been so savagely contested across so many industries. One of these industries in the United States of America is the Media industry.Any business that is related to the media such as film production, broadcasting, distribution, movie theatre’s, television, book publishing, newspaper publishing, recorded music, etc. belongs to the media industry. The media industry is a powerful communication tool. The media Industry has captivated many companies however, only a few of these companies has grown big. These Media giants companies have taken over and dominated the local media market and soon will conquer the...
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...Why are oligopolies tempted to collude? Stephen (2007) and Stuart (2007) have identified that oligopoly refers to a situation where a few dominate the market, often producing a large number of branded products. And, Kevin, (2005) states that it is defined as the situation in which the number of firms is sufficiently small for the action of a single firm to be able to influence the market. In this essay, I am going to talk about why are oligopolies tempted to collude, give some example and theory to prove it. Undoubtedly, there are some features of oligopolies. It exists when there are only a few dominating sellers, each of them occupies a significant share of the market. For example, major airlines like British Airways and Air France operate their routes with only a few close competitors, but there are also many small airlines catering for the holidaymaker or offering specialist services. Besides, it is difficult for new forms to enter to the market. As the existing firms are well-established and have already benefited from economies of scale, so the new firms have to pay high cost to compete with them. Also, the market information is imperfect so that no one can know all the market information such as price, quality and quantity, etc. Furthermore, Carol et al, (2007) writes that oligopolists often use non- price competition, they differentiated services and marketing campaigns are used to boost sales, such as advertising and offering free gifts to distinguish their products...
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...Evaluate the effectiveness of monopolistic competition and oligopolies in meeting the needs of producers and consumers. A market is a place where buyers and sellers meet to exchange money for goods and services. There are four market structures; perfect competition, monopolistic competition, oligopoly and monopoly. Each structure of market operates in their own ways with each with their own characteristics; each structure has its own number and size of the firms, the level of the competition, product differentiation and difficulty of entering new firms into the market. The two similar structures are monopolistic competition and oligopolies; although they are similar they still operate quite different to each other. Monopolistic competition is defined as the structure with many small firms selling products of similar kind, therefore lots of choice and lots of range which means that there are lots of substitutes. Due to the fact that there are lots of substitutes price plays an important role; if a firm has established some sort of brand name or store name it will be able to charge a slightly increased price, but yet a very high increase in price will result in decrease of its market share. As firms have a very limited control on price to gain more consumers firms are involved in strong non-price competition of quality, advertising, packaging, promoting brand names, etc… To enter into a monopolistic market is relatively easy as there is no established market. Examples of this...
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