Economics
Oligopoly Vs Perfect Competition
Oligopoly and perfect competition are two distinct market structures in economics. In an oligopoly, a small number of large firms dominate the market, leading to interdependence and potential for collusion. In perfect competition, there are many small firms, each with no market power, leading to price-taking behavior and efficient allocation of resources.
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11 Key excerpts on "Oligopoly Vs Perfect Competition"
- Thomas J. Webster(Author)
- 2018(Publication Date)
- Routledge(Publisher)
A special case of oligopoly is duopoly , which is an industry comprising just two firms. Imperfectly competitive firms fall somewhere in between perfectly competitive price takers and monopolistic price makers. The important aspect of imperfect competition is the extent to which the pricing, output, and other decisions by one firm affect, and are affected by, the decisions of rival firms. Oligopoly An industry dominated by a few large firms producing identical or closely related products in which pricing and output decisions of rivals are interdependent. IMPERFECT COMPETITION 177 Duopoly An industry consisting of two firms producing homogeneous or differentiated products. The pricing and output decisions of oligopolistic firms reflect the nature of competition in the industry. To be successful, each firm is required to know as much about its rivals’ operations as it does about its own. Moreover, while entry into the industry is possible, it is very difficult. This allows these firms to earn positive economic profits for a significantly longer period of time than under perfect competition, where low barriers to entry suggest that incumbent firms’ profits will be quickly competed away. For oligopolies to earn economic profits in the long run, legal or economic barriers to entry must be very high. Bain (1956) argued that these barriers represent inherent advantages enjoyed by incumbent firms over latent competitors. Stigler (1968) argued that entry barriers comprise any costs not borne by incumbents that must be paid by potential rivals. Many of the barriers to entry erected by oligopolists are the same as those used by monopolists, such as the ownership of patents and copyrights. Oligopolists can also limit entry by controlling distribution outlets, such as by persuading retail chains to carry only its product. Persuasion may take the form of selective discounts, long-term supply contracts, or gifts to management.
eBook - PDFEconomics for Investment Decision Makers
Micro, Macro, and International Economics
- Christopher D. Piros, Jerald E. Pinto(Authors)
- 2013(Publication Date)
- Wiley(Publisher)
Chapter 4 The Firm and Market Structures 145 industries are doomed to extinction by a lack of profits. On the contrary, millions of busi- nesses that do very well are living under the pressures of perfect competition. Monopolistic competition is also highly competitive; however, it is considered a form of imperfect competition. Two economists, Edward H. Chamberlin (United States) and Joan Robinson (United Kingdom), identified this hybrid market and came up with the term because there are strong elements of competition in this market structure and also some monopoly-like conditions. The competitive characteristic is a notably large number of firms, while the monopoly aspect is the result of product differentiation. That is, if the seller can convince consumers that its product is uniquely different from other, similar products, then the seller can exercise some degree of pricing power over the market. A good example is the brand loyalty associated with soft drinks such as Coca-Cola. Many of Coca-Cola’s customers believe that the beverage is truly different from and better than all other soft drinks. The same is true for fashion creations and cosmetics. The oligopoly market structure is based on a relatively small number of firms supplying the market. The small number of firms in the market means that each firm must consider what retaliatory strategies the other firms will pursue when prices and production levels change. Consider the pricing behavior of commercial airline companies. Pricing strategies and route scheduling are based on the expected reaction of the other carriers in similar markets. For any given route—say, from Paris, France, to Chennai, India—only a few carriers are in competition. If one of the carriers changes its pricing package, others will likely retaliate. Understanding the market structure of oligopoly markets can help in identifying a logical pattern of strategic price changes for the competing firms.
eBook - PDF- Tucker, Irvin Tucker(Authors)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. ............................................................................................................................................................................................... ................................................................................................................................................................................................................. ............................................................................................................................................................................................... ................................................................................................................................................................................................................. by bombarding us with advertising on television and filling our mailboxes with junk mail. Economists define an oligopoly as a market structure characterized by (1) few large sellers, (2) either a homogeneous or a differentiated product, and (3) difficult mar-ket entry. Like monopolistic competition, oligopoly is found in real-world industries. Let ’ s examine each characteristic. 10-4a CHARACTERISTICS OF OLIGOPOLY Few Sellers Oligopoly is competition “ among the few. ” Here we refer to the “ Big Three ” or “ Big Four ” to mean that three or four firms dominate an industry. But what does “ a few ” firms really mean? Does this mean at least two, but less than ten? As with other market structures, the answer is there is no specific number of firms that must dominate an industry before it is an oligopoly. Basically, an oligopoly is a consequence of mutual interdependence . Mutual interdependence is a condition in which an action by one firm may cause a reaction from other firms.
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 - PDFEconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Monopolistic Competition and Oligopoly 10 • Why do some pizza makers deliver? • Why is Perrier water sold in green, tear-shaped bottles? • Why are some shampoos sold only in salons? • Which market structure is like a golf tournament and which is more like a tennis match? • Why do airlines sometimes engage in airfare warfare? • Why was the OPEC oil cartel created, and why has it met with only spotty success? • Why is there a witness protection program? To answer these and other questions, we turn in this chapter to the vast gray area that lies between perfect competition and monopoly. the food passionates/Corbis Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. 219 P erfect competition and monopoly are extreme market structures. Under perfect competition, many suppliers offer an identical product and, in the long run, entry and exit erase economic profit. A monopolist supplies a prod- uct with no close substitutes in a market where natural or artificial barriers keep out would-be competitors, so a monopolist can earn economic profit in the long run. These polar market structures are logically appealing and offer a useful description of some industries observed in the economy. But most firms fit into neither market structure. Some markets have many sellers pro- ducing goods that vary slightly, such as the convenience stores that abound.
eBook - PDFMicroeconomics
A Contemporary Introduction
- William A. McEachern(Author)
- 2016(Publication Date)
- Cengage Learning EMEA(Publisher)
Liran Einav et al. “Assessing Sales Strategies in Online Markets Using Matched Listings,” American Economic Journal: Microeconomics (forthcoming). Copyright 2017 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it. Chapter 10 Monopolistic Competition and Oligopoly 239 10-4 Comparison of Oligopoly and Perfect Competition As we have seen, each approach explains a piece of the oligopoly puzzle. But each has limitations, and none provides a complete picture of oligopoly behavior. Because there is no typical, or representative, model of oligopoly, “the” oligopoly model cannot be compared with the competitive model. We might, however, imagine an experiment in which we took the many firms that populate a competitive industry and, through a series of giant mergers, combined them to form, say, four firms. We would thereby transform the industry from perfect competition to oligopoly. How would firms in this industry behave before and after the massive merger? 10-4a Oligopoly Price is Usually Higher With fewer competitors after the merger, remaining firms would become more interdepen-dent. Oligopoly models presented in this chapter suggest why firms may try to coordinate their pricing policies. If oligopolists engaged in some sort of implicit or explicit collusion, industry output would be smaller and the price would be higher than under perfect com-petition. Even if oligopolists did not collude but simply operated with excess capacity, the price would be higher and the quantity lower with oligopoly than with perfect competi-tion.
eBook - PDF- William F. Samuelson, Stephen G. Marks, Jay L. Zagorsky(Authors)
- 2022(Publication Date)
- Wiley(Publisher)
However, an alternative point of view claims that monopoly (i.e., large firms) offers significant efficiency advantages vis-a-vis small firms. 5 According to this hypothesis, monopoly reflects superior efficiency in product development, production, distribution, and marketing. A few firms grow large and become dominant because they are efficient. If these cost advantages are large enough, consumers can obtain lower prices from a market dominated by a small number of large firms than from a competitive market of small firms. Thus, a price comparison between a tight oligopoly and a competitive market depends on which is the greater effect: the oligopoly’s cost reductions or its price increases. For example, suppose that in the competitive market P c = AC c , and, in the tight oligopoly P o = 1.15AC o . Absent a cost advan- tage, the oligopoly exhibits higher prices. But if the oligopoly’s average cost advantage exceeds 15 percent, it will have the lower overall price. The evidence concerning monopoly efficiency is mixed at best. It is hard to detect significant effi- ciency gains using either statistical approaches or case studies. Large firms and market leaders do not appear to be more efficient or to enjoy larger economies of scale than smaller rivals. (They do profit from higher sales and prices afforded by brand-name allegiance.) Nonetheless, the efficiency issue offers an important reminder that greater concentration per se need not be detrimental. Indeed, the government’s antitrust guidelines mentioned earlier cover many factors—concentration, ease of entry, extent of ongoing price competition, and possible efficiency gains—in evaluating a particular industry. Business Behavior Global Airfares Fares on air routes around the world offer a textbook case of the link between concentration and prices. Numerous research studies have shown that average fares on point-to-point air routes around the globe vary inversely with the number of carriers.
eBook - PDF- J. R. Clark(Author)
- 2014(Publication Date)
- Academic Press(Publisher)
10. The total sales of the four top firms in an industry as a percentage of the total sales of the c. barriers to entry are high and market demand is unstable. d. All of the above are correct. 10. The market pricing of an oligopolist's product could be expected to: a. be higher than the price arising from a perfectly competitive market but lower than that of a monopolist b. be lower than the price arising from a perfectly competitive market and lower than that of the monopolist c. be equal to marginal cost d. be equal to the monopolist's price but higher than the price that would arise from a competitive market. Monopolistic Competition and Oligopoly 133 SECTION FOUR Problems and Projects 1. Research and write a paper on competition. What is meant by competition? How does the element of monopoly in monopolistic competition affect the process of competition? Why is competition important if markets are to work efficiently? Can competition protect the consumer from the market power of sellers? Is competition sometimes destructive or counterproductive? Defend or criticize competition as a method of allocating goods and resources. Be specific. Feel free to suggest and defend alternatives that you think are superior to the competitive market process. 2. Suppose that you produce and sell dining tables in a localized market. Past experience permits you to estimate your demand and marginal cost schedules. This information is presented in Exhibit 1. a. Fill in the missing revenue and cost schedules. b. If you were currently charging $55 per dining table set, what should you do if you wanted to maximize profits? Given your demand and cost estimates, what would be the maximum weekly profit you could earn? c. Exhibit 1 Quantity demanded Marginal Total Marginal Fixed Total Price (per week) cost revenue revenue cost cost $60 1 $50 $40 55 2 20 50 3 26 45 4 30 40 5 40 35 6 50 3. Currently there are four rival firms in the typewriter industry.
eBook - PDFIntermediate Microeconomics
A Tool-Building Approach
- Samiran Banerjee(Author)
- 2021(Publication Date)
- Routledge(Publisher)
Chapter 13 Oligopoly Just as economists make sense of what happens in competitive markets in terms of the market equilibrium that arises from the interaction of demand and supply, in an oligopolistic equilibrium, the behavior of firms corresponds to that of a Nash equilibrium (NE), i.e., each firm is maximizing its profit given the actions of the others. Oligopolies are usually modeled in one of two ways: firms either choose the quantities they wish to produce ( quantity competition ), or they choose the prices they wish to charge ( price competition ). While the game-theoretic ideas are exactly the ones introduced in Chapter 12, the only difference is that the firms typically choose their actions from a continuum rather than a finite set of discrete options. For instance, under quantity competition, a firm can choose any output ranging from zero to its capacity; under price competition, a firm can charge any price ranging from its marginal cost of production to the maximum price that buyers are willing to pay for it. 13.1 Static Quantity Competition We begin with an example of the classic duopoly model of Augustin Cournot that dates back to 1838 but is still one of the most important ways in which economists think about quantity competition. 13.1.1 Cournot duopoly Two firms produce a homogeneous good. Firm 1 produces quantity q 1 and 2 produces q 2 , so the total quantity produced is Q = q 1 + q 2 . The firms face 242 Oligopoly 243 an inverse market demand given by p = 200 − Q , or p = 200 − q 1 − q 2 . It costs each firm $20 to produce each unit of output. We assume that each firm chooses its own output taking as given the other firm’s production level. Graphical representation One way to find an NE for this problem graphically is to plot each firm’s best-response to the other firm’s output choice and find a point of mutual best-response. To do so, assume that firm 2 has chosen its output level arbitrarily at q 2 .
eBook - PDFEconomic Analysis in Historical Perspective
Butterworths Advanced Economics Texts
- J. Creedy, D.P. O'Brien(Authors)
- 2014(Publication Date)
- Butterworth-Heinemann(Publisher)
Chapter Five Oligopoly and the Theory of the Firm A.S. Skinner and M.C. MacLennan 5.1 Introduction This chapter falls into two distinct parts. The first is essentially historical, and is intended to set the scene for the more analytical approach to the study of oligopoly which follows. In section 5.2 an attempt is made to recall some familiar features of Marshall's work before going on to consider a number of contributions to particular topics, such as the theories of perfect competition, duopoly and monopoly. Section 5.3 is concerned with competition and monopoly, with particular reference to the work of Edward Chamberlin. The purpose of the second part is to review the various routes which economic theory has followed since Chamberlin. Section 5.4 considers developments which are broadly associated with the content and limitations of Chamberlinian analysis. These include the problems posed by the existence of a kinked demand curve, barriers to entry and the existence of potential competition, the departure from the objective of profit maximization based on marginalist rules in favour of normal cost, entry-deterring pricing, and the various methods of collusion and co-operation which firms may adopt to deal with the uncertainty created by their awareness of interdependence. The problems of oligopolistic interdependence are then re-considered in terms of the 'new' theories which treat the firm as a complex, multi-product, multi-plant organization where ownership and management are vested in separate groups; where short-run profit maximization is replaced by other objectives; and the growth of the firm is explicitly considered. Section 5.5 then identifies the main points of difficulty in oligopoly theory, to which the work reviewed has drawn attention, and considers how these might be dealt with. This involves an examination of current and projected work on oligopoly, and a reconsideration of some earlier work which has important 117
eBook - PDFMicroeconomics
Principles and Policy
- William Baumol, Alan Blinder(Authors)
- 2015(Publication Date)
- Cengage Learning EMEA(Publisher)
2. Strategic Interaction Although some oligopolists may ignore interdependence some of the time, models based on such behavior probably do not offer a general explanation for most oligopoly behavior most of the time. The reason is simple: Because they operate in the same market, the price and output decisions of soapsuds makers Brand X and Brand Y really are interdependent. Suppose, for example, that Brand X, Inc., managers decide to cut their soapsuds’ price from $1.12 to $1.05, on the assumption that rival Brand Y, Inc., will ignore this move and continue to charge $1.12 per box. Brand X decides to manufacture 5 million boxes per year and to spend $1 million per year on advertising. It may find itself surprised when Brand Y cuts its price to $1.00 per box, raises production to 8 million boxes per year, and sponsors the Super Bowl! In such a case, Brand X’s profits will suffer, and the company will wish it had not cut its price in the first place. Most important for our purposes, Brand X managers will learn not to ignore interdependence in the future. For many oligopolies, then, competition may resemble military operations involving tactics, strategies, moves, and countermoves. Thus, we must consider models that deal explicitly with oligopolistic interdependence. 3. Cartels The opposite of ignoring interdependence occurs when all firms in an oli-gopoly try to do something about their interdependence and agree to set price and output, acting as a monopolist would. In a cartel , firms collude directly to coordinate their actions to transform the industry into a giant monopoly. A notable cartel is the Organization of Petroleum Exporting Countries (OPEC), which first began making joint decisions on oil production in the 1970s. For a while, OPEC was one of the most spectacularly successful cartels in history. By restricting output, its mem-ber nations managed to quadruple the price of oil between 1973 and 1974.
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