Sweezy Oligopoly

6 Key excerpts on "Sweezy Oligopoly"

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  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

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  Essentials of Microeconomics

  • Bonnie Nguyen, Andrew Wait(Authors)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

  15 Oligopoly

  DOI: 10.4324/9781315690339-15

  15.1 Introduction

  We now turn to the case of oligopoly, a market that contains a small number of firms. Because there are only a handful of key producers in the market, the decisions of each firm have ramifications for not only itself but also for each of its competitors. For example, if Dell adjusts its price for one of its laptops, this will generally have an impact on its competitors, such as HP. Similarly, if a department store decides to advertise, it might be able to increase its customer base at the expense of other firms. Given the impact oligopolists have on one another, a firm’s strategic choice – be it price, its output, whether it introduces a new product and so on – will typically depend on what other firms in the market are doing. For instance, a brewer might consider dropping its price following a price reduction from a major beer manufacturer in the same market. In the soft-drink market, following the introduction of a new energy drink by Pepsi, Coca-Cola may choose to respond with its own alternative. In a similar way, if Samsung introduces a new phone handset, Apple will consider what it should do regarding a new version of its iPhone. A pharmaceutical company will consider what new drugs its rivals are trying to develop (and those that they already have patents for) when considering its own research and development programme. This strategic interaction between firms is a key feature of oligopoly; moreover, this sort of strategic interaction is absent in other market structures we previously studied (perfect competition, monopoly and monopolistic competition).

  We model strategic interaction in oligopoly using game theory. We have previously discussed the core concepts and tools of game theory in Chapter 3 . In this chapter, our goal is to illustrate how game theory tools can be applied in the context of an oligopoly. In doing so, we will highlight a few key examples of how firms in an oligopoly strategically interact with each other, but our examples will by no means be an exhaustive demonstration of what game theory can tell us in this context. We urge you to familiarize yourself with the contents of Chapter 3

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  eBook - ePub

  Microeconomics

  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.

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  Microeconomic Principles and Problems

  A Pluralist Introduction

  • Geoffrey Schneider(Author)
  • 2024(Publication Date)
  • Routledge

    (Publisher)

  Products may be differentiated or undifferentiated: Oligopolistic industries that manufacture goods for consumers (cars, cell phones, etc.) sell differentiated products. Oligopolistic industries that manufacture materials used in the production of other goods, such as inputs like steel or aluminum, tend to produce undifferentiated products.
• Dominated by a few huge firms: A handful of giant firms control most of the industry. There may be some smaller firms, but the major dynamics of the market revolve around the interplay between the dominant firms.
• Significant barriers to entry: In manufacturing, economies of scale are so significant that only huge firms with access to the latest technology and a global supply chain can compete. In consumer goods, brand name recognition and first mover advantages (where consumers get comfortable with a particular product, such as Facebook or the iPhone) allow certain companies to dominate. It is extremely difficult for new firms to enter such markets.
• Interdependence among firms: When a handful of firms dominate an industry, the actions of one of the big players have a large and direct impact on the other firms. Firms watch each other very closely and try to match price cuts and counter advertising campaigns. This also leads to incentives for firms to collude to act like a monopoly, or to merge in order to lessen competition. Most instances of collusion occur in oligopolies.
Strategic considerations in oligopolistic markets are multiple and complex. The importance of size and technology means firms must invest substantially in research and development. The importance of brand name recognition means that there is substantial non-price competition, usually in the form of vast advertising and marketing campaigns. Collusion and mergers and acquisitions are also ways to reduce competition and enhance profits. And oligopolistic firms can secure their position in a market via hiring lobbyists and making donations to campaigns and political action committees to get reductions in taxes and regulations that inhibit their profits. An interesting example of the type of competition we see in an oligopoly is the Cola Wars and the efforts by Coca-Cola to preserve its market share.