Economics
Oligopolistic Market
An oligopolistic market is characterized by a small number of large firms dominating the industry, leading to intense competition and interdependence among the firms. These firms have the power to influence prices and market conditions, often resulting in strategic behavior such as price leadership or collusion. Oligopolies can lead to reduced consumer choice and potential for anti-competitive practices.
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12 Key excerpts on "Oligopolistic Market"
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 - ePubIndustrial Organization
Competition, Growth and Structural Change
- Kenneth George, Caroline Joll, E L Lynk(Authors)
- 2005(Publication Date)
- Routledge(Publisher)
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). Potential competition and entry deterrence are covered in. This chapter summarises a range of different approaches to analysing price-setting under oligopoly, and it will be seen that this is a dense and rich area of industrial economics. The plan of the chapter is as follows: section 7.2 introduces the game theory approach to oligopoly; sections 7.3 and 7.4 examine non-cooperative and collusive oligopoly models respectively; section 7.5 looks at average cost pricing as a way of achieving price coordination; and, lastly, section 7.6 briefly surveys the different types of empirical evidence on oligopoly pricing. Because the central issue is how to handle interdependence and firms’ reaction to interdependence, the meaning of interdependence is spelt out in more detail in the next section. Oligopolistic interdependence Let us assume that all the firms in our industry are aiming to maximise their profits, that they produce a homogeneous product and that the market demand curve is given by Q = α − βP; where Q is market output and P is market price. The problem for a single oligopolistic firm is that, unlike either a monopolist or a competitive firm, it does not face a given demand curve. Rather, the amount it can sell at any price depends on the behaviour of the other firms in the market
eBook - PDF- Steven A. Greenlaw, Timothy Taylor(Authors)
- 2015(Publication Date)
- Openstax(Publisher)
If oligopolists collude with each other, they may effectively act like a monopoly and succeed in pushing up prices and earning consistently high levels of profit. Oligopolies are typically characterized by mutual interdependence where various decisions such as output, price, advertising, and so on, depend on the decisions of the other firm(s). Analyzing the choices of oligopolistic firms about pricing and quantity produced involves considering the pros and cons of competition versus collusion at a given point in time. Why Do Oligopolies Exist? A combination of the barriers to entry that create monopolies and the product differentiation that characterizes monopolistic competition can create the setting for an oligopoly. For example, when a government grants a patent for an invention to one firm, it may create a monopoly. When the government grants patents to, for example, three different pharmaceutical companies that each has its own drug for reducing high blood pressure, those three firms may become an oligopoly. Similarly, a natural monopoly will arise when the quantity demanded in a market is only large enough for a single firm to operate at the minimum of the long-run average cost curve. In such a setting, the market has room for only one firm, because no smaller firm can operate at a low enough average cost to compete, and no larger firm could sell what it produced given the quantity demanded in the market. Quantity demanded in the market may also be two or three times the quantity needed to produce at the minimum of the average cost curve—which means that the market would have room for only two or three oligopoly firms (and they need not produce differentiated products). Again, smaller firms would have higher average costs and be unable to compete, while additional large firms would produce such a high quantity that they would not be able to sell it at a profitable price.
eBook - PDF- Luis Ortiz Blanco(Author)
- 2011(Publication Date)
- Hart Publishing(Publisher)
10 However, the degree of interdependence common to all markets is highly exagger- ated in oligopolies. Thus, it has been said that an oligopoly forces each operator to bear in mind his rivals’ policies when determining his own, without leaving himself open to the possibility that this is interpreted as a ‘tacit agreement’ contrary to the competition rules. 11 Interdependence as regards decisions on prices, production or capacity, 12 or even geographic scope, 13 does not in itself, however, mean that a given market is non- 6 ‘There appear to be as many oligopoly theories as there are economists who have written on the subject.’ Bork (1978) 102, cited in Etter (2000) 111, and in Temple Lang (2002) 357. Brock (2006) 228–32 criticises the modern theory of oligopolies, which he describes as having ‘no grounding whatsoever’ and refers to the ‘profusion of confusion’, which is partly the result of an ‘effusion of theoretical acrobatics’. For their part, Hawk & Motta (2008) 2 distinguish two phases in the study of oligopolies – the first being marked by ‘dogmatism’ and ‘criticism’ and the second, post-1970, by a certain ‘agnosticism’ towards oligopolies. 7 Briones & Padilla (2001) 309 fn 3 explain that ‘the oligopoly issue has proven so difficult to tackle under competition policies, that there has been a remarkable proliferation of terms, each of which evokes a large set of complexities’. See also Black (2003) 222 and fn 24. 8 Petit (2007) 23 cites Bain (1959) 423–24, who assumed that a narrow oligopoly existed when the eight most significant operators in the market produced between two-thirds and three-quarters of total production. Petit also cites Kaysen and Turner (1959) 104, for whom the existence of a narrow oligopoly could be presumed – and, con- sequently, the existence of anticompetitive effects – from the point where eight companies have a market share of 50%, up to 15 companies enjoying a market share of 80%.
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
eBook - ePubMicroeconomics
A Global Text
- Judy Whitehead(Author)
- 2014(Publication Date)
- Routledge(Publisher)
In this chapter, several of the classical or traditional models and the standard models of oligopoly, including the Game Theory are examined. The more recent developments in the theory of the firm pertaining mainly to the market structure of oligopoly are left to the next chapter.12.1 Assumptions, Definitions and Summary of Models
12.1.1 Assumptions
There are a number of assumptions that are common to all models of oligopoly. These are:- The industry consists of a small number of firms. This is understood to be fewer than under the market structure of Monopolistic Competition.
- The goal of the firm is to maximize profit.
- All factors are freely available to the firm at given prices.
- There is a great deal of interdependence (actual and/or perceived).
- The products in the industry may be homogeneous or differentiated.
Reasons for oligopoly
Typically, oligopoly exists because of:- Economies of scale in production.
- Economies of scale in advertising or promotion of the product.
- Limited access to raw materials.
- Government controls on access to the market (e.g. permit requirements, etc.).
- Capital barriers to entry.
- Branding and preference barriers or other barriers to entry.
12.1.2 Definitions
Classical or traditional oligopoly
The term classical oligopoly is used to distinguish the traditional models from the modern or alternative models of the firm introduced since the 1950s. The non-collusive and collusive models listed above are all part of classical or traditional oligopoly.Pure and differentiated oligopoly
Under pure oligopoly firms produce a homogenous product (e.g. flour, salt). Under differentiated oligopoly firms produce a differentiated product (e.g. automobiles, refrigerators). These products are usually differentiated by branding. As with Monopolistic Competition, the differences may be real or fancied. However, they must be such that the consumer perceives the products to be different.12.1.3 Model summary
The various traditional or classical models of oligopoly may be grouped into the two major classes of non-collusive and collusive. The game theory approach to modelling oligopoly in terms of competitors in a game with strategies and counter-strategies may be included among the traditional models. The models may be summarized as follows.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
For, clearly, if each of two rivals makes equal efforts to attract the favour of the public away from the other, the total result is the same as it would have been if neither had made any effort at all. Chapter 10 | Monopolistic Competition and Oligopoly 241 10.2 | Oligopoly By the end of this section, you will be able to: • Explain why and how oligopolies exist • Contrast collusion and competition • Interpret and analyze the prisoner’s dilemma diagram • Evaluate the tradeoffs of imperfect competition Many purchases that individuals make at the retail level are produced in markets that are neither perfectly competitive, monopolies, nor monopolistically competitive. Rather, they are oligopolies. Oligopoly arises when a small number of large firms have all or most of the sales in an industry. Examples of oligopoly abound and include the auto industry, cable television, and commercial air travel. Oligopolistic firms are like cats in a bag. They can either scratch each other to pieces or cuddle up and get comfortable with one another. If oligopolists compete hard, they may end up acting very much like perfect competitors, driving down costs and leading to zero profits for all. If oligopolists collude with each other, they may effectively act like a monopoly and succeed in pushing up prices and earning consistently high levels of profit. We typically characterize oligopolies by mutual interdependence where various decisions such as output, price, and advertising depend on other firm(s)' decisions. Analyzing the choices of oligopolistic firms about pricing and quantity produced involves considering the pros and cons of competition versus collusion at a given point in time. Why Do Oligopolies Exist? A combination of the barriers to entry that create monopolies and the product differentiation that characterizes monopolistic competition can create the setting for an oligopoly.
eBook - PDF- Steven A. Greenlaw, Timothy Taylor, David Shapiro(Authors)
- 2017(Publication Date)
- Openstax(Publisher)
For, clearly, if each of two rivals makes equal efforts to attract the favour of the public away from the other, the total result is the same as it would have been if neither had made any effort at all. Chapter 10 | Monopolistic Competition and Oligopoly 243 10.2 | Oligopoly By the end of this section, you will be able to: • Explain why and how oligopolies exist • Contrast collusion and competition • Interpret and analyze the prisoner’s dilemma diagram • Evaluate the tradeoffs of imperfect competition Many purchases that individuals make at the retail level are produced in markets that are neither perfectly competitive, monopolies, nor monopolistically competitive. Rather, they are oligopolies. Oligopoly arises when a small number of large firms have all or most of the sales in an industry. Examples of oligopoly abound and include the auto industry, cable television, and commercial air travel. Oligopolistic firms are like cats in a bag. They can either scratch each other to pieces or cuddle up and get comfortable with one another. If oligopolists compete hard, they may end up acting very much like perfect competitors, driving down costs and leading to zero profits for all. If oligopolists collude with each other, they may effectively act like a monopoly and succeed in pushing up prices and earning consistently high levels of profit. We typically characterize oligopolies by mutual interdependence where various decisions such as output, price, and advertising depend on other firm(s)' decisions. Analyzing the choices of oligopolistic firms about pricing and quantity produced involves considering the pros and cons of competition versus collusion at a given point in time. Why Do Oligopolies Exist? A combination of the barriers to entry that create monopolies and the product differentiation that characterizes monopolistic competition can create the setting for an oligopoly.
eBook - PDF- Garth Saloner, Andrea Shepard, Joel Podolny(Authors)
- 2016(Publication Date)
- Wiley(Publisher)
In fact, many industries have a few large players and some much smaller firms. In these indus- tries, the leading firms face both the competitive problems of an oligopoly because they are competing with other major players and the problems of a dominant firm structure because the smaller competitors, in aggregate but not individually, constrain the profitability of the leading firms. 8.2 OLIGOPOLY: THE ELEMENTS OF STRATEGIC INTERACTION In Chapter 6, we emphasized two distinguishing features of oligopoly: (1) These industries contain a few, large firms, and (2) the behavior of these firms determines how profitable the incumbent firms in the industry will be. These features are related. Because the firms are large (“large” here means having a large market share), their actions affect market outcomes. Think about an industry that only has two firms (a “duopoly”), each of which has half the market. If one of the firms in the market increases its output by 10 percent and the other firm holds its output constant, indus- try output will increase by 5 percent, and prices will have to fall to induce buyers to 186 CHAPTER 8 • COMPETITION IN CONCENTRATED MARKETS purchase the expanded supply. This will cause the profits at the firm that did not increase its output to fall. The actions of one firm in an oligopoly affect market out- comes—price and market shares in this case—and they also affect the profits of its competitors. Since the actions of each firm affect the performance of other firms, each can expect its own actions to spark a reaction by its rivals. The reaction of competing firms can pro- foundly affect the profitability of the initial action. A firm may, for example, decide to compete primarily on the basis of low costs. If its competitors decide to compete on the basis of other attributes, such as service quality or time-to-market, the industry incum- bents may avoid intense price competition because they are not competing “head-to- head” on any dimension.
eBook - PDF- Steven A. Greenlaw, David Shapiro, Daniel MacDonald(Authors)
- 2022(Publication Date)
- Openstax(Publisher)
Most of the markets that consumers encounter at the retail level are monopolistically competitive. The other type of imperfectly competitive market is oligopoly. Oligopolistic Markets are those which a small number of firms dominate. Commercial aircraft provides a good example: Boeing and Airbus each produce slightly less than 50% of the large commercial aircraft in the world. Another example is the U.S. soft drink industry, which Coca-Cola and Pepsi dominate. We characterize oligopolies by high barriers to entry with firms choosing output, pricing, and other decisions strategically based on the decisions of the other firms in the market. In this chapter, we first explore how monopolistically competitive firms will choose their profit- maximizing level of output. We will then discuss oligopolistic firms, which face two conflicting temptations: to collaborate as if they were a single monopoly, or to individually compete to gain profits by expanding output levels and cutting prices. Oligopolistic Markets and firms can also take on elements of monopoly and of perfect competition. 10.1 Monopolistic Competition LEARNING OBJECTIVES By the end of this section, you will be able to: • Explain the significance of differentiated products • Describe how a monopolistic competitor chooses price and quantity • Discuss entry, exit, and efficiency as they pertain to monopolistic competition • Analyze how advertising can impact monopolistic competition Monopolistic competition involves many firms competing against each other, but selling products that are distinctive in some way. Examples include stores that sell different styles of clothing; restaurants or grocery stores that sell a variety of food; and even products like golf balls or beer that may be at least somewhat similar but differ in public perception because of advertising and brand names. There are over 600,000 restaurants in the United States.
eBook - PDFRegulating Public Services
Bridging the Gap between Theory and Practice
- Emmanuelle Auriol, Claude Crampes, Antonio Estache(Authors)
- 2021(Publication Date)
- Cambridge University Press(Publisher)
12.2 Choosing between an Oligopolistic and a Monopolistic Market Structure The Eurostar example shows that direct or indirect competition is something regula- tors need to worry about for services that were traditionally considered to be unavoid- able monopolies. Indeed, in some sectors, thanks to innovation and lower economies of scale, such as mobile telecommunications, competition has become the norm rather than the exception. In these cases, the formerly monopolistic structure takes the explicit or implicit form of an oligopolistic structure. The new possibility of competi- tion, in the market or across markets, is also changing the way regulation needs to be designed and implemented. The global scale of the reforms since the mid-1980s reflects a widespread convic- tion that making the most of the scope for competition in the industries that had traditionally been controlled by vertically integrated monopolies would yield better outcomes than those observed until then. The benefit of an increased sample of producers from which to choose would reduce variable costs ex post. It would also yield the possibility to rely on some form of yardstick competition between the firms because of the correlation of firms’ private information, and hence to reduce the cost of asymmetric information. Having an alternative choice to rely on for service provision also meant that the regulator would be less dependent on any specific regulated firm. All this would be achieved while avoiding the problem of decreasing returns to scale once the major fixed costs have been incurred. In many cases these benefits did indeed outweigh the duplication of the fixed costs. Thinking through the scope for change in a market structure, and what it means for regulation, involves more than new technological opportunities. It is also linked to a regulator’s ability (or lack of it) to behave in the public interest.
- Michal S. Gal, Michal S. GAL(Authors)
- 2009(Publication Date)
- Harvard University Press(Publisher)
Requiring the sugar refineries to price their products without taking into account their rivals’ prices is, un-der such market conditions, highly problematic. Direct price regulation is also problematic, as it requires courts to fix prices for oligopolists at a “reasonable” or “competitive” level. Such a remedy raises important issues of competence and of moni-toring. The high costs of oligopolistic prices and the fact that they result from highly concentrated markets have led to several proposals for se-lective restructuring of persistently non-competitive oligopolistic mar-kets, subject to an efficiency defense. 66 The essence of these proposals 180 • Competition Policy for Small Market Economies is that because oligopolistic interdependence is based on high concen-tration levels, reducing such levels by way of breaking up existing ri-vals into smaller competing units would hinder the natural conditions required to sustain oligopolistic interdependence. A variation on this proposal involves inhibiting the creation of market structures that predispose firms to oligopolistic interdependence. Restructuring is, however, a limited remedy. Most important, a pro-gram of combating oligopoly by restructuring concentrated markets may result in a loss of productive efficiency when concentration is based on scale economies. This factor is especially significant for small economies. In view of the scale economies present in many of their markets, improvement of industrial structure usually means the creation of fewer and larger firms in each industry rather than divesti-ture. In addition, it is questionable whether a court of law would be able to differentiate between large firms that are based on scale econo-mies and those that are not. These considerations, and particularly the difficulty of devising an efficient remedy for combating conscious parallelism, have led most jurisdictions to leave conscious parallelism to the admittedly limited disciplining forces of the market.
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