Oligopoly
Oligopoly
Oligopoly
Oligopoly is a market form in which a market or industry is dominated by a small number of sellers which is oligopolists. Oligopolies can result from various forms of collusion which reduce competition and lead to higher costs for consumers. With few sellers, each oligopolist is likely to be aware of the actions of the others. The decisions of one firm therefore influence and are influenced by the decisions of other firms. Strategic planning by oligopolists needs to take into account the likely responses of the other market participants. Example of Oligopoly: Industries which are examples of oligopolies include:
They are less concentrated than in a monopoly, but more concentrated than in a competitive system.
There is still competition within an oligopoly, as in the case of airlines. Airlines match competitors air fares when sharing the same routes. Also, automobile companies compete in the fall as the new models come out. One will reduce financing rates and the others will follow suit. The businesses offer an identical product or services.
This creates a high amount of interdependence which encourages competition in non price-related areas, like advertising and packaging. The tobacco companies, soft drink companies, and airlines are examples of an imperfect oligopoly.
Classificaton of Oligopoly:
Oligopoly are classified either as Pure oligopoly or Differentiated oligopoly. If the products produced by the various firms are identical,we have pure oligopoly.
This model is found in some of the capital goods industries,such as the cement and the oil industry. Differentiated oligopoly on the other hand,exist in industries where products are not homogeneous.
This model is found in most manufactured consumer goods.The car industry and the appliance industry are examples of differentiated oligopoly.
Perfect Collusion:
A cartel,or a formal organization of the producers within a given industry,is an example of perpect collusion among the sellers in an industry.A good example of a cartel is the Organization of Petroleum Exporting Countries(OPEC). Cartel,in ordel to be successful and effective,must posses the following characteristic: 1)All producers or sellers in the industry are included in the agreement 2)The agreement is definite and enforceable on all parties to it
3)It covers both the price to be charged and the quantity of output is be produced by each agreeing seller,the output allocation being calculated as to minimize the aggregate cost of producing the total output of the industry 4)It also include a formula for distributing the pro its of the combined operations among the agreeing parties,and 5)All parties adhers rigorously to the terms of agreement
Imperfect Collusion:
Imperfect collusion is made up mostly of tacit informal arrangement under which the firms of an industry seek to establish prices and outputs.Usually,gen tlemens agreements of varios sorts affecting pricing,output,distribution,market sharing and other activities within the industry can be worked out Collusion of this type results from the failure to meet one or more of the characteristics of perfect collution as mentioned previously.This variation can come about basically in the following ways. 1)Incompletely observed collution,there is a collusion agreement among existing sellers either formal or tacit,aired at fixing prices or output,but is not rigorously observed some or all of the sellers 2)Collusion with indefinite terms of agreement among sellers affecting prices or output,but its terms are ether ambiguous or ambiguously understood by some or all sellers. 3)Collusion with incomplete participation of the sellers in the industry 4)Interdependent action without agreement.
The gap in the marginal revenue curve means that marginal costs can fluctuate without changing equilibrium price and quantity.[18] Thus prices tend to be rigid.
Barriers to entry:
Oligopolies and monopolies may maintain their position of dominance in a market because it is too costly or difficult for potential rivals to enter the market. Obstacles to entry are called barriers to entry. They can be erected deliberately by the incumbent called artificial barriers or they can exploit barriers that naturally exist in the market, also called natural barriers.
Output Restriction:
An oligopolistic firm ordinarily faces a demand curve for its output that is down-wardslopping to the right,or that is less than perfectly elastic.As a consequence,marginal revenue at each level of sales is less than the price.and since the profit maximizing firm produses the output level at which marginal revenue equals marginal cost,marginal cost will be less than the product price
Range of Production:
Differentiated oligopoly provides each consumers with a broader range of products among which to choose than does either pure competition or pure monopoly.Rather than being limited to a single king and quality of say automobiles,each consumercan choose the kind and quality that best suits individual needs and income Gradation in product qualities with each lower quality selling at a correspondingly lower price,increase the divisibility of the consumers purchases of particular items.
Chapter 10
Oligopoly
Reported by: Jayrald Almarez Marvin Cubol Narbel Rosales