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Sweezy Oligopoly
Sweezy Oligopoly, named after economist Paul Sweezy, refers to a market structure where a small number of large firms dominate the industry and engage in non-price competition. In this model, firms are interdependent and may engage in price leadership, where one firm sets the price and others follow. Sweezy Oligopoly is characterized by barriers to entry and the potential for collusion among firms.
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7 Key excerpts on "Sweezy Oligopoly"
eBook - PDF- William Boyes, Michael Melvin(Authors)
- 2015(Publication Date)
- Cengage Learning EMEA(Publisher)
And in Poland, a candidate for finance minister argued that the country’s current economic problems are due to the dominance of just one or a few firms in the fuel sectors and the financial markets. When a few firms domi-nate a market, an oligopoly is said to exist. Oligopoly is a market structure characterized by (1) few firms and (2) difficult entry. Oligopoly may take many forms. It may consist of one dominant firm coexisting with many smaller firms or a group of giant firms that dominate the industry. The characteristic that describes oligopoly is interdependence; an individual firm in an oligopoly does not decide what to do without considering what the other firms in the industry will do. When a large firm in an oligopoly changes its behavior, the demand curves of the other firms are affected significantly. In perfectly competitive markets, what one firm does affects each of the other firms so slightly that each firm essentially ignores the others. Each firm in an oligopoly, however, must watch the actions of the other firms closely because the actions of one can dramatically affect the others. This interdependence among firms leads to actions not found in the other market structures. 26-2a The Creation of Oligopolies In the chapter titled “Monopoly,” it was noted that a monopoly could, theoretically, arise as a result of natural barriers to entry such as economies of scale, actions on the part of firms that create barriers to entry, or governmentally created barriers. Oligopolies can arise for similar reasons. The roots of Mexico’s oligopolies, for example, reach back to the 1950s and 1960s, when the government funded private businesses and closed the domestic market to international competition. During that era, the government created a culture in which the state supported companies—government officials forced mergers to create larger companies, and later helped their friends who headed those companies.
eBook - ePubIndustrial Organization
Competition, Growth and Structural Change
- Kenneth George, Caroline Joll, E L Lynk(Authors)
- 2005(Publication Date)
- Routledge(Publisher)
Chapter 7
Oligopoly pricing
7.1 INTRODUCTION
Chapter 5 looked at different aspects of market structure, and its importance. This showed that market structure is an important determinant of conduct and performance, but that it is necessary to realise both that structure does not rigidly determine performance, and also that structure is not exogenous but can be affected by firms’ behaviour. Chapter 6 examined the market structure which is closest to the textbook case of simple monopoly—i.e. dominance. In this chapter we move on to consider industries which can be described as oligopolistic and focus attention on pricing behaviour in these industries. An oligopolistic industry contains a small number of firms, which means that the effect of any action taken by one of the firms will depend on how its rivals react. For instance, a price cut by one firm will result in a larger increase in sales if the other firms in the industry maintain their existing price than if they all follow its example.It is this interdependence which is the defining characteristic of oligopoly and which makes the analysis of oligopolistic industries so much more difficult than that of either more concentrated (monopoly) or less concentrated (competitive) industries. Yet it is very important to be able to understand the behaviour of firms in oligopolistic industries because so many markets in advanced economies consist of a relatively small number of firms who are intensely aware of their rivals’ reactions to any competitive move.Monopolies or dominant firms are able to decide on their pricing and other policies without worrying about the reactions of any other, smaller, firms in the market. In oligopolistic markets, firms have a certain amount of scope for independent action, but are constrained by their rival firms to an extent which depends on, among other things, the number and size of the oligopolists and the similarity of their products. This chapter considers only price-setting behaviour, and only as influenced by competition among existing competitors. Other important aspects of oligopolistic behaviour include: product differentiation (Chapter 8 ), and research and development (Chapter 9
No longer available |Learn more- (Author)
- 2014(Publication Date)
- Orange Apple(Publisher)
Buyers have only imperfect knowledge as to price, cost and product quality. Interdependence : The distinctive feature of an oligopoly is interdependence. Oligopolies are typically composed of a few large firms. Each firm is so large that its actions affect market conditions. Therefore the competing firms will be aware of a firm's market actions and will respond appropriately. This means that in contemplating a market action, a firm must take into consideration the possible reactions of all competing firms and the firm's countermoves. It is very much like a game of chess or pool in which a player must anticipate a whole sequence of moves and countermoves in determining how to achieve his objectives. For example, an oligopoly considering a price reduction may wish to estimate the likelihood that competing firms would also lower their prices and possibly trigger a ruinous price war. Or if the firm is considering a price increase, it may want to know whether other firms will also increase prices or hold existing prices constant. This high degree of interdependence and need to be aware of what the other guy is doing or might do is to be contrasted with lack of interdependence in other market structures. In a PC market there is zero interdependence because no firm is large enough to affect market price. All firms in a PC market are price takers, information which they robotically follow in maximizing profits. In a monopoly there are no competitors to be concerned about. In a monopolistically competitive market each firm's effects on market conditions is so negligible as to be safely ignored by competitors. ____________________ WORLD TECHNOLOGIES ____________________ Modeling There is no single model describing the operation of an oligopolistic market. The variety and complexity of the models is due to the fact that you can have two to 102 firms competing on the basis of price, quantity, technological innovations, marketing, advertising and reputation.
eBook - PDFMicroeconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
230 Part 3 Market Structure and Pricing 10-3 Three Approaches to Oligopoly Because oligopolists are interdependent, analyzing their behavior is complicated. No single model or single approach explains oligopoly behavior completely. At one extreme, oligopolists may try to coordinate their behavior so they act collectively as a single monopolist, forming a cartel, such as OPEC. At the other extreme, oligopolists may compete so fiercely that price wars erupt, such as those that break out among airlines, tobacco companies, computer chipmakers, and wireless service providers. Several theories have been developed to explain oligopoly behavior. We will study three of the better-known approaches: collusion, price leadership, and game theory. As you will see, each has some relevance in explaining observed behavior, although none is entirely satisfactory as a general theory of oligopoly. Thus, there is no general theory of oligopoly but rather a set of theories, each based on the diversity of observed behavior in an interdependent market . 10-3a Collusion and Cartels In an oligopolistic market, there are just a few firms so, to decrease competition and increase profit, these firms may try to collude, or conspire to rig the market. Collusion is an agreement among firms in the industry to divide the market and fix the price. A cartel is a group of firms that agree to collude so they can act as a monopoly to increase economic profit. Cartels are more likely among sellers of a commodity, like oil or steel. Colluding firms, compared with competing firms, usually produce less, charge more, block new firms, and earn more economic profit. Consumers pay higher prices, and potential entrants are denied the opportunity to compete. Collusion and cartels are illegal in the United States. And more nations around the world, particularly those in Europe, are cracking down on collusion and cartels. 10 Still, monopoly profit can be so tempting that some firms break the law.
eBook - PDFEconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
230 Part 3 Market Structure and Pricing 10-3 Three Approaches to Oligopoly Because oligopolists are interdependent, analyzing their behavior is complicated. No single model or single approach explains oligopoly behavior completely. At one extreme, oligopolists may try to coordinate their behavior so they act collectively as a single monopolist, forming a cartel, such as OPEC. At the other extreme, oligopolists may compete so fiercely that price wars erupt, such as those that break out among airlines, tobacco companies, computer chipmakers, and wireless service providers. Several theories have been developed to explain oligopoly behavior. We will study three of the better-known approaches: collusion, price leadership, and game theory. As you will see, each has some relevance in explaining observed behavior, although none is entirely satisfactory as a general theory of oligopoly. Thus, there is no general theory of oligopoly but rather a set of theories, each based on the diversity of observed behavior in an interdependent market. 10-3a Collusion and Cartels In an oligopolistic market, there are just a few firms so, to decrease competition and increase profit, these firms may try to collude, or conspire to rig the market. Collusion is an agreement among firms in the industry to divide the market and fix the price. A cartel is a group of firms that agree to collude so they can act as a monopoly to increase economic profit. Cartels are more likely among sellers of a commodity, like oil or steel. Colluding firms, compared with competing firms, usually produce less, charge more, block new firms, and earn more economic profit. Consumers pay higher prices, and potential entrants are denied the opportunity to compete. Collusion and cartels are illegal in the United States. And more nations around the world, particularly those in Europe, are cracking down on collusion and cartels. 10 Still, monopoly profit can be so tempting that some firms break the law.
eBook - ePub- J. Bridge, J. C. Dodds(Authors)
- 2018(Publication Date)
- Taylor & Francis(Publisher)
Table 6.2 . Further examination of the Census data reveals that if the rate of growth in concentration experienced during the 1958-68 period is maintained, something of the order of two thirds of products will have concentration ratios (based on net output) of between 80 and 100 per cent by 1993. Thus as overall concentration, industry concentration and concentration in specific product markets is increasing, a study of big business behaviour is vital to economists and students of management alike. The rest of this chapter examines models of oligopoly behaviour and discusses some of the attempts to control oligopoly and monopoly through public policy.Oligopoly relates to fewness of sellers (duopoly where there are only two) and it can take the pure form (where there is an homogeneous product) or the more usual imperfect form where there is product differentiation. The distinguishing feature of oligopoly is not just the number of sellers but rather the mutual interdependence felt by oligopolistic firms in their decision making. We illustrated above how firms under conditions of perfect competition were price takers and free to pursue their output policy without recourse to considering the activities of other firms operating in the same market. An absolute monopolist with complete control of a product and its close substitutes, is also free to pursue an independent line of policy. When we come to oligopoly, however, a firm must have regard to the activities of other firms in the industry who are supplying for the same market. This is not to say that at all decision levels this will be the case but certainly for many strategic decisions governing the future course of the firm – such as the launching of new products and the associated advertising and promotional expenditures firms should take account of the anticipated reactions of rivals. Pricing decisions, although frequently classified as operating decisions* may also give rise to interdependence. In fact there may be a complex interplay of anticipated strategies and counter-strategies which firms engage in, a topic which is examined later in this section in terms of the theory of games. Firms can either ignore interdependence - particularly for operating decisions (as we illustrate later in the Baumol sales revenue maximisation model) or make some specific evaluation as to how rivals will react to a given policy change; this evaluation is sometimes called the ‘conjectural variation’. Alternatively they may try to reduce the uncertainty of interdependence by collusion (see G. Stigler [142
eBook - ePubThe Microeconomics of Wellbeing and Sustainability
Recasting the Economic Process
- Leonardo Becchetti, Luigino Bruni, Stefano Zamagni(Authors)
- 2019(Publication Date)
- Academic Press(Publisher)
This criticism suffers from a weakness, which Chamberlin himself pointed out: it overlooks the fact that differentiation is linked to consumer preferences, who are often willing to pay a higher price in order to have the possibility of choosing from among different varieties of the same type of good. This is as if to say that product diversity comes at a price. Said another way, the possibility of actually being able to make a choice is a positive argument in consumers' utility functions, who show that they increasingly appreciate its value. Regarding the comparison with a monopoly, note that over the long run extra profits are zero in both perfect and monopolistic competition. A monopoly enterprise, however, can earn extra profits even over the long run as long as it is able to maintain the entry barriers it set up for its protection. Finally, we observe that resources are inefficiently allocated in both a monopoly and in monopolistic competition.6.5. An oligopolistic market
6.5.1. Its distinctive characteristics
An oligopoly is a market structure in which several companies operate, but none of them have a negligible market share (as happens in perfect competition). Every oligopolistic enterprise is thus able to exercise a certain influence on the relevant price and/or quantity variables and is aware that other companies operating in the sector can, by their decisions, do the same. The distinctive nature of an oligopolistic structure is that there is strategic interaction between companies; such interaction is absent in a monopoly and in perfect competition, in which companies, taking price as a given, behave atomistically.Consider a duopoly, or a market in which there are only two suppliers and multiple buyers. In addition to company A , another company B produces and sells an identical product as its rival. Suppose the two companies know the behavior of the good's consumers, summarized by the demand function p=f (q ); p indicates the price and q indicates the total output, which is equal to the sum of qAand qB, representing the production levels of the two companies A and B respectively. For the sake of simplicity, assume that production costs are zero. If each company independently chooses its output level to maximize its profits (indicated by π ), then firm A chooses qAto maximize πA=pqA=f (qA+qB)qA. As we see, πAalso depends on qB; that is, A 's optimal output level choice is no longer independent of the output level simultaneously chosen by the other company, as it is in perfect competition. Thus there is no demand curve for an individual company in an oligopoly; the quantity of product an oligopolist can sell at a certain price depends on what its rivals do. This is why an oligopolist can never know with certainty
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