Oligopoly

6 Key excerpts on "Oligopoly"

• 

  eBook - PDF

  Economics

  • William Boyes, Michael Melvin(Authors)
  • 2015(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  § 26-1a 3. What is Oligopoly? • Oligopoly is a market structure in which a few large firms produce identical or slightly different products and entry is difficult but not impossible. The firms are interdependent. § 26-2 • Oligopolies may arise from government restrictions or from natural economic factors such as economies of scale. § 26-2a 4. In what form does rivalry occur in an Oligopoly? • Strategic behavior characterizes Oligopoly. The firms are interdependent. The actions of each oligopolist will affect its competitors, and each will be affected by the actions of its rivals. § 26-2b • Game theory is a description of behavior when players’ decisions depend on the decisions of the other players. § 26-2b • The prisoners’ dilemma illustrates an outcome in which competition among interdependent firms results in an outcome that is less than the best for each firm. § 26-2c • The prisoners’ dilemma is a noncooperative game also called a dominant strategy game, one in which the parties select the dominant strategy. By doing so they do not select the best outcome for the parties as a whole. § 26-2c • A dominant strategy is one a player will select no matter what strategy other players choose. §26-2c • Nash equilibrium is an equilibrium when unilateral action by one party will make the party worse off. § 26-2c TABLE 3 Summary of Perfect Competition, Monopoly, Monopolistic Competition, and Oligopoly Perfect Competition Monopoly Monopolistic Competition Oligopoly Number of firms Many One Many Few Type of product Identical One Differentiated Identical or differentiated Entry conditions Easy Difficult or impossible Easy Difficult Demand curve Horizontal (perfectly elastic) Downward sloping Downward sloping Downward sloping Price and marginal cost MC ¼ P MC < P MC < P MC < P Long-run profit Normal Yes Normal Depends on whether entry occurs 582 Chapter 26 Monopolistic Competition and Oligopoly Copyright 2016 Cengage Learning.

  Sign up to read

  Learn more about book
• 

  eBook - ePub

  Industrial 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

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Market Power in EU Antitrust Law

  • 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%.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Competition Policy for Small Market Economies

  • Michal S. Gal, Michal S. GAL(Authors)
  • 2009(Publication Date)
  • Harvard University Press

    (Publisher)

  C H A P T E R F I V E The Regulation of Oligopoly Markets Oligopoly markets create some of the principal competition policy di-lemmas for small economies. Owing to limited market demand and high entry barriers, many markets in small economies are oligopo-listic. Oligopoly market structures are characterized by rivalry among a small number of competitors in which no firm holds a dominant po-sition. Rational behavior in such markets requires that each oligo-polist take into account the effects of its actions on its rivals in its decision-making process. Interdependence among rival firms is thus inevitable. This inherent characteristic of oligopolies may reduce or eliminate competitive pressures by creating incentives for firms to co-ordinate their conduct. By avoiding competition among themselves, oligopolists can attain shared market power that may allow them to maintain prices above the competitive level. Depending on the exist-ing market conditions, the level of interaction among oligopolists may vary from fierce rivalry through conscious parallelism (i.e., the unilat-eral decisions of oligopolists that simply take into account their mu-tual interdependence) to cooperative agreements, including cartels or joint ventures. Market forces have limited ability to regulate many oligopolistic markets in small economies. Not only are concentrated market struc-tures commonly justified by production efficiency considerations, but also the small size of the market may create additional high entry bar-riers that secure oligopolistic market positions even further. Entry of foreign firms may have only limited welfare effects unless the firms are willing to enter at a level that will change significantly the existing market equilibrium or they enjoy significant cost advantages. Regula-tion thus plays an influential role in bringing about more competitive outcomes in oligopolistic markets.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Microeconomics

  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.

  Sign up to read

  Learn more about book
• 

  eBook - PDF

  Economics

  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.

  Sign up to read

  Learn more about book