OLIGOPOLY

OLIGOPOLY

OLIGOPOLY-a market structure in which only a few sellers offer similar or identical products. Examples of Oligopolistic MarketAutomobile IndustryOil IndustryCigarette IndustrySteel IndustryCereal Industry

Oligopoly is a market structure characterized by:

Few sellersEither a homogeneous or a differentiated productDifficult market entry

Few SellersUnder oligopoly, the bulk of market supply is in the hands of a relatively few large firms who sell to many small buyers. We an therefore say that oligopoly is competition among the few.As with other market structures, there is no specific number of firms that must dominate an industry before it is an oligopoly.What does few firms really mean?An oligopoly is a consequence of mutual interdependence. It is a condition in which an action of one firm may cause reaction from other firms.Changes in price, advertising, product characteristics, etc. may stimulate response by rivals.Example:

Market for cars in Philippines is dominated by few firms (Suzuki, Nissan, Honda, etc.). A change by any one firm (for example Suzuki,) in any of its vehicle (Swift) will induce other firms to make changes in their respective vehicles.CARTELSFormal (explicit) agreement among firms.

Usually occur in an oligopolistic industry, where there is a small number of sellers and usually involve homogeneous products.

Members may agree on such matters as price fixing, total industry output, market shares, allocation of customers, allocation of territories, establishment of common sales agencies, and the division of profits or combination of these. The aim of such agreement is to increase individual member's profits by reducing competition.

EXAMPLES OPEC: As its name suggests, OPEC is organized by sovereign states is a good example of cartel. De Beers is a cartel of companies that trade in rough diamond exploration.Collusion: is an agreement, usually secretive, which occurs between two or more persons to deceive, mislead, or defraud others of their legal rights, or to obtain an objective forbidden by law typically involving fraud or gaining an unfair advantage. It can involve "wage fixing, kickbacks, or misrepresenting the independence of the relationship between the colluding parties."

Features of Collusion * Uniform prices * A penalty for price discounts * Advance notice of price changes * Information exchange

Oligopoly firms may collude (act as a monopoly) and earn positive profits.

OR

Oligopolists may compete with each other and drive prices down to where profits are zero.Homogeneous or Differentiated ProductThe products offered by suppliers may be identical or, more commonly, differentiated from each other in one or more respects.These differences may be of a physical nature, involving functional features, or may be purely imaginary in a sense that artificial differences are created through advertising and sales promotion.Example:

Difficult EntrySimilar to monopoly, there are formidable barriers of entry which make it difficult for new firms to enter the market.High barriers to entry in an oligopoly protect firms from new entrants. These barriers include:Exclusive financial requirements

Control over essential resourcePatent rightsHigh capital requirement and other legal barriers17Example:Pharmaceutical manufacturers are one type of company that generally rely on patents, which makes competition irrelevant for a period of time after development: competitors can't legally begin manufacturing the product until the patent expires.

18Additional sources of barriers to entry often result from government regulation favoring existing firms. For example,requirements for licenses andpermitsmay raise theinvestmentneeded to enter a market, creating an effective barrier to entry.

Example:19Economies of Scale.-the most significant barriers to entry in an oligopoly marketFor example, microprocessing companies face highresearch and development costs before possibly making aprofit. This means that new firms cannot enter the market whenever existing firms are making a positiveeconomic profit, as is the case inperfect competition.

The Kinked Demand Curve GraphA gap in the MR curve exists A large shift in marginal cost is required before firms will change their priceQPQMC1DMRPIf P increases, others wont go along, so D is elastic If P decreases, other firms match the decrease, so D is inelasticMC2Gap