Oligopolistic Market

10 Key excerpts on "Oligopolistic Market"

• 

  eBook - ePub

  Microeconomic Principles and Problems

  A Pluralist Introduction

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

    (Publisher)

  a market that is dominated by a few huge firms whose behavior affects each other significantly. There are large barriers to entry that keep out new competitors. In general, markets become oligopolistic when there are significant benefits to being huge. For example, in the manufacturing of cars, cell phones, steel, and other products, producing on a massive scale results in much lower costs of production. Firms can develop specialized plants utilizing very specialized equipment and labor to produce each component and additional specialized factories to assemble the components. That degree of specialization reduces costs and increases productivity significantly. Similarly, national retail chains like Walmart, Amazon, and Costco have vast networks of warehouses that allow these firms to supply goods cheaply to any corner of the country. Even more important, their huge size gives them the power to demand lower prices from their suppliers, allowing national retailers to sell goods at lower prices and thereby undercut smaller competitors. In addition, their financial resources allow huge firms in Oligopolistic Markets to buy out competitors and to cultivate political favors by making campaign contributions and hiring lobbyists. This allows oligopolists to continue to dominate markets, even if they are not particularly efficient. Competition to stay ahead often takes on a complex form in oligopolies (colluding, merging, advertising, lobbying), rather than the price competition we find in competitive markets.

  The major characteristics of an oligopoly are as follows:

  1. 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.
  2. Dominated by a few huge firms:

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  eBook - ePub

  Intermediate Microeconomics

  Neoclassical and Factually-oriented Models

  • Lester O. Bumas(Author)
  • 2015(Publication Date)
  • Routledge

    (Publisher)

    Consider more deeply the boundaries of a market. There may be hundreds and sometimes thousands of retail stores selling the same product in a metropolitan region such as New York City. But much shopping takes place in a given neighborhood in which there are only a small number of stores for various kinds of common products: a few groceries, a couple of bakeries, three green grocers, a few banks, a couple of hardware stores, two gas stations, two auto repair shops, and several restaurants with only one or two of a particular culinary type. Each knows the existence of rivals selling close substitutes and, I suspect, pays some attention to their activities. These very small firms are also quasi-oligopolies.

    By the way, Adam Smith was well aware of the significance of the size of the market. His chapter “That the Division of Labour is Limited by the Size of the Market” indicates this. In a small market, he asserted, the country carpenter “is not only a carpenter, but a joiner, a cabinet maker, and even a carver in wood, as well as a wheelwright, a ploughwright, a cart and waggon maker” (1937, [1776], p. 17).

  Summary on Oligopoly

  Oligopolies are large firms which dominate an industry and are rival conscious. Some of our most important industries are dominated by oligopolies. Cournot’s duopoly model is the oldest of those attempting to indicate the effect of a rival on the decision-making of a firm. Sweezy’s kinked demand function, based upon the assumed reactions of rivals, helps to explain the tendency of oligopoly prices to be sticky—to respond slowly to changes in supply and demand. Game theoretic models attempt to add to our understanding of the strategic actions made in the context of expected responses and sometimes independent actions of rivals.

    Concentration ratios are a measure of the extent of monopolization in a market. The traditional four largest firm measure has many imperfections, some of which are resolved by the Herfindahl-Hirschman concentration index.

    Price leadership frequently evolves in lieu of price competition. Non-price competition is the norm in stable oligopolies. Their advantage is that some forms of non-price competition are difficult to emulate, some can be hidden from view, and none are as threatening as price competition.

    Oligopolistic Markets have barriers to entry. These arise from the economies of large-scale production, large financial start-up requirements, the need for special hard-to-get resources, and the requirement of special know-how. Technological advances have mixed effects on the development of this market form. Discoveries of value can, on the one hand, lead in the direction of monopolization and, on the other hand, allow for easier entry and an increase in competition.

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  eBook - ePub

  The Economy as a System of Power

  Corporate Systems

  • George Sternlieb(Author)
  • 2017(Publication Date)
  • Routledge

    (Publisher)

  15 Oligopolistic Cooperation: Conceptual and Empirical Evidence of Market Structure Evolution

  John R. Munkirs and James I. Sturgeon

  In this article we introduce the concept of oligopolistic cooperation based on structural intradependence, and propose it as a more accurate description of the industries that comprise the industrial core of the U.S. economy. Many economists agree that oligopoly is the most prevalent market structure in the United States and other industrialized countries.1 This is especially true in finance, mining, and manufacturing. Even though the chief characteristics of oligopoly are “few” firms and psychological interdependence among these firms, it is usual to characterize their behavior as competitive, although not always via price. This characterization of their behavior suggests the name “oligopolistic competition.”

  Here we distinguish between oligopolistic competition and what we call oligopolistic cooperation.2 Specifically, cooperation is intended to signify behavior that goes beyond coordination or “unconscious parallelism.” And, while cooperation is similar to coordination in some respects, there are fundamental differences. The primary difference is that in oligopolistically cooperative industries specific, legally binding, quasi-permanent organizational structures exist. In turn this type of organizational structure provides not only the means but the necessity for cooperative behavior. Cooperative behavior, in turn, has profound implications for the relevance of micro and macro economic theory as well as public policy.

  Oligopolistic Competition: The Standard View

  Leading oligopoly theorists such as Fritz Machlup and E. H. Chamber-lain have argued that as a result of mutual interdependence the basic problem facing oligopolists involves the reaction of competitors to each others' price, quality, production, and capacity decisions. Fewness creates a psychological awareness and intense rivalry absent in other market structures. More than thirty years ago Machlup made the point as follows:

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  eBook - ePub

  The 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 q

  A

  and q

  B

  , 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 q

  A

  to maximize π

  A

   

  =

   

  pq

  A

   

  =

   

  f (q

  A

   

  +

   

  q

  B

  )q

  A

  . As we see, π

  A

  also depends on q

  B

  ; 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

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  eBook - ePub

  Economic Principles and Problems

  A Pluralist Introduction

  • Geoffrey Schneider(Author)
  • 2021(Publication Date)
  • Routledge

    (Publisher)

  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 that 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.