An oligopoly (from the
Ancient Greek ὀλίγος, olígos, 'few' + πωλεῖν, poleîn, 'to sell')
is a market form wherein a market or industry is dominated by a small number of
large sellers (oligopolists). Oligopolies can result from various forms of
collusion which reduce competition and lead to higher prices for consumers.
Oligopolies have their own market structure.
With few sellers, each oligopolist is likely to be aware of the actions of the others. According to game theory, the decisions of one firm therefore influence and are influenced by decisions of other firms. Strategic planning by oligopolists needs to take into account the likely responses of the other market. Entry barriers include high investment requirements, strong consumer loyalty for existing brands and economies of scale. In developed economies oligopolies dominate the economy as the perfectly competitive model is of negligible importance for consumers. Oligopolies differ from price takers in that they do not have a supply curve. Instead, they search for the best price-output combination.
Description of Oligopoly
Oligopoly is a common market form where a number of firms are in competition. As a quantitative description of oligopoly, the four-firm concentration ratio is often utilized. This measure expresses, as a percentage, the market share of the four largest firms in any particular industry. For example, as of fourth quarter 2008, if we combine total market share of Verizon Wireless, AT&T, Sprint, and T-Mobile, we see that these firms, together, control 97% of theU.S.
Oligopolistic competition can give rise to both wide-ranging and diverse outcomes. In some situations, particular companies may employ restrictive trade practices (collusion, market sharing etc.) in order to inflate prices and restrict production in much the same way that a monopoly does. Whenever there is a formal agreement for such collusion, between companies that usually compete with one another, this practice is known as a cartel. A prime example of such a cartel is OPEC, which has a profound influence on the international price of oil.
Firms often collude in an attempt to stabilize unstable markets, so as to reduce the risks inherent in these markets for investment and product development. There are legal restrictions on such collusion in most countries. There does not have to be a formal agreement for collusion to take place (although for the act to be illegal there must be actual communication between companies)–for example, in some industries there may be an acknowledged market leader which informally sets prices to which other producers respond, known as price leadership.
In other situations, competition between sellers in an oligopoly can be fierce, with relatively low prices and high production. This could lead to an efficient outcome approaching perfect competition. The competition in an oligopoly can be greater when there are more firms in an industry than if, for example, the firms were only regionally based and did not compete directly with each other.
Thus the welfare analysis of oligopolies is sensitive to the parameter values used to define the market's structure. In particular, the level of dead weight loss is hard to measure. The study of product differentiation indicates that oligopolies might also create excessive levels of differentiation in order to stifle competition.
Oligopoly theory makes heavy use of game theory to model the behavior of oligopolies:
Characteristics Consistent with Oligopoly
https://en.wikipedia.org/wiki/Oligopoly
= = = = = = Oligopoly Can Be Good or Bad or Both = = = = = =
The
Advantages and Disadvantages of Oligopoly
Jan 28, 2016 and June 16, 2015 by Crystal Lombardo
1. High Profits
Since there is such little competition, the companies that are involved in the market have the potential to bring a large amount of profits. The services and goods that are controlled through oligopolies are generally highly needed or wanted by the large majority of the population.
2. Simple Choices
Having only a few companies that offer the goods or service that you are looking for makes it easy to compare between them and choose the best option for you. In other markets it can be difficult to thoroughly look at all of the competitors to compare pricing and services offered.
3. Competitive Prices
Being able to easily compare prices forces these companies to keep their prices in competition with the other companies involved in the market. This is a great benefit for the consumers because prices continually go lower as other companies lower there prices.
4. Better Information and Goods
Right along with price competition, product competition plays a huge part in a the oligopoly market structure. Each company scrambles to come out with latest and greatest thing in order to sway consumers to go with their company over a different one. This also goes with the advertising and amount of information and support that they provide their customers.
The Disadvantages of
Oligopoly
1. Difficult To Forge A Spot
For small business and other people with creative ideas in a oligopoly market, the outlook for their business is grim. Extremely large and advanced companies completely control the market, making it nearly impossible for small or new businesses to break into the market place.
2. Less Choices
In many cases having to choose a company in an oligopoly is like choosing the lesser evil. The consumers have very limited choices and options for the services that they want. This is one of the biggest pitfalls of a oligopoly.
3. Fixed Prices Are Bad For Consumers
While competitive prices come into play, they are rarely very far apart from any other company that they could go with. This is because the businesses and corporations that are part of the market agree to fix prices. Meaning there is a set limit for just how low prices can go, forcing consumers to pay high prices no matter what.
4. No Fear Of Competition
Often times the companies that are in the oligopoly market become very settled with their business. The profits and the way they run are guaranteed to work, so they no longer feel the need to come up with creative or innovate new ideas.
With few sellers, each oligopolist is likely to be aware of the actions of the others. According to game theory, the decisions of one firm therefore influence and are influenced by decisions of other firms. Strategic planning by oligopolists needs to take into account the likely responses of the other market. Entry barriers include high investment requirements, strong consumer loyalty for existing brands and economies of scale. In developed economies oligopolies dominate the economy as the perfectly competitive model is of negligible importance for consumers. Oligopolies differ from price takers in that they do not have a supply curve. Instead, they search for the best price-output combination.
Description of Oligopoly
Oligopoly is a common market form where a number of firms are in competition. As a quantitative description of oligopoly, the four-firm concentration ratio is often utilized. This measure expresses, as a percentage, the market share of the four largest firms in any particular industry. For example, as of fourth quarter 2008, if we combine total market share of Verizon Wireless, AT&T, Sprint, and T-Mobile, we see that these firms, together, control 97% of the
Oligopolistic competition can give rise to both wide-ranging and diverse outcomes. In some situations, particular companies may employ restrictive trade practices (collusion, market sharing etc.) in order to inflate prices and restrict production in much the same way that a monopoly does. Whenever there is a formal agreement for such collusion, between companies that usually compete with one another, this practice is known as a cartel. A prime example of such a cartel is OPEC, which has a profound influence on the international price of oil.
Firms often collude in an attempt to stabilize unstable markets, so as to reduce the risks inherent in these markets for investment and product development. There are legal restrictions on such collusion in most countries. There does not have to be a formal agreement for collusion to take place (although for the act to be illegal there must be actual communication between companies)–for example, in some industries there may be an acknowledged market leader which informally sets prices to which other producers respond, known as price leadership.
In other situations, competition between sellers in an oligopoly can be fierce, with relatively low prices and high production. This could lead to an efficient outcome approaching perfect competition. The competition in an oligopoly can be greater when there are more firms in an industry than if, for example, the firms were only regionally based and did not compete directly with each other.
Thus the welfare analysis of oligopolies is sensitive to the parameter values used to define the market's structure. In particular, the level of dead weight loss is hard to measure. The study of product differentiation indicates that oligopolies might also create excessive levels of differentiation in order to stifle competition.
Oligopoly theory makes heavy use of game theory to model the behavior of oligopolies:
- Stackelberg's duopoly. In this model, the
firms move sequentially (see Stackelberg competition).
- Cournot's duopoly. In this model, the firms
simultaneously choose quantities (see Cournot competition).
- Bertrand's oligopoly. In this model, the firms
simultaneously choose prices (see Bertrand competition).
Characteristics Consistent with Oligopoly
Profit maximization conditions
An oligopoly maximizes profits.
Ability to set price
Oligopolies are price setters rather than price takers.
Entry and exit
Barriers to entry are high. The most important barriers are government
licenses, economies of scale, patents, access to expensive and complex
technology, and strategic actions by incumbent firms designed to discourage or
destroy nascent firms. Additional sources of barriers to entry often result
from government regulation favoring existing firms making it difficult for new
firms to enter the market.
Number of firms
"Few" – a "handful" of sellers. There are so few firms
that the actions of one firm can influence the actions of the other firms.
Long run profits
Oligopolies can retain long run abnormal profits. High barriers of entry
prevent sideline firms from entering market to capture excess profits.
Product differentiation
Product may be homogeneous (steel) or differentiated (automobiles).
Perfect knowledge
Assumptions about perfect knowledge vary but the knowledge of various
economic factors can be generally described as selective. Oligopolies have
perfect knowledge of their own cost and demand functions but their inter-firm
information may be incomplete. 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 firms' countermoves. It is very much
like a game of chess, in which a player must anticipate a whole sequence of
moves and countermoves in order to determine how to achieve his or her
objectives; this is known as game theory. 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
anticipation leads to price rigidity, as firms will only be willing to adjust
their prices and quantity of output in accordance with a "price
leader" in the market. This high degree of interdependence and need to be
aware of what other firms are doing or might do stands in contrast with the
lack of interdependence in other market structures. In a perfectly competitive
(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, as
current market selling price can be followed predictably to maximize short-term
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.
Non-Price Competition
Oligopolies tend to compete on terms other than price. Loyalty schemes,
advertisement, and product differentiation are all examples of non-price
competition.
https://en.wikipedia.org/wiki/Oligopoly
= = = = = = Oligopoly Can Be Good or Bad or Both = = = = = =
The
Advantages and Disadvantages of OligopolyJan 28, 2016 and June 16, 2015 by Crystal Lombardo
An oligopoly is a form of market
where only a small group of companies or suppliers control all of the market.
This is different than a monopoly, which is where only one company or business
control the entire market. There are many different industries that are ruled
by oligopolies, some of the most common are the health care industry, the media
industry, and the cellular phone service industry. The suppliers are generally
very large, and have set standards among each other in order to keep
competition and prices under control. There are certainly some benefits of a
oligopoly market structure, but many drawbacks as well.
1. High Profits
Since there is such little competition, the companies that are involved in the market have the potential to bring a large amount of profits. The services and goods that are controlled through oligopolies are generally highly needed or wanted by the large majority of the population.
2. Simple Choices
Having only a few companies that offer the goods or service that you are looking for makes it easy to compare between them and choose the best option for you. In other markets it can be difficult to thoroughly look at all of the competitors to compare pricing and services offered.
3. Competitive Prices
Being able to easily compare prices forces these companies to keep their prices in competition with the other companies involved in the market. This is a great benefit for the consumers because prices continually go lower as other companies lower there prices.
4. Better Information and Goods
Right along with price competition, product competition plays a huge part in a the oligopoly market structure. Each company scrambles to come out with latest and greatest thing in order to sway consumers to go with their company over a different one. This also goes with the advertising and amount of information and support that they provide their customers.
The Disadvantages of
Oligopoly
1. Difficult To Forge A Spot
For small business and other people with creative ideas in a oligopoly market, the outlook for their business is grim. Extremely large and advanced companies completely control the market, making it nearly impossible for small or new businesses to break into the market place.
2. Less Choices
In many cases having to choose a company in an oligopoly is like choosing the lesser evil. The consumers have very limited choices and options for the services that they want. This is one of the biggest pitfalls of a oligopoly.
3. Fixed Prices Are Bad For Consumers
While competitive prices come into play, they are rarely very far apart from any other company that they could go with. This is because the businesses and corporations that are part of the market agree to fix prices. Meaning there is a set limit for just how low prices can go, forcing consumers to pay high prices no matter what.
4. No Fear Of Competition
Often times the companies that are in the oligopoly market become very settled with their business. The profits and the way they run are guaranteed to work, so they no longer feel the need to come up with creative or innovate new ideas.
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