Economics oligopolistic uncertainty

oligopoly examples

This type is found in steel, copper, cement petrol and a few other industries. Each firm, therefore, recognizes that it is interdependent with the other firms in the industry. This superior knowledge can deter entrants into the market.

No other firm will raise its price. Product Differentiation Oligopolies can form when product differentiation causes decreased competition within an industry.

Interdependence economics oligopoly

This interdependence is unique to the oligopoly market structure; in perfect and monopolistic competition, we assume that each firm is small enough that the rest of the market will ignore its actions. Such prices are not market prices and thus not determined by demand and supply but are administered or managed by the firms themselves either through leader-follow relationship or some sort of collusion overt or covert. The chief characteristic of oligopoly is the interdependence among the rival sellers. This point may be explained further. Hence, for price rise the relevant part of the oligopolists demand curve will be the elastic segment dC. Sales promotion, such as buy-one-get-one-free BOGOF , is associated with the large supermarkets, which is a highly oligopolistic market, dominated by three or four large chains. Unlike perfect competition and monopoly, uncertainty about how rival firms interact makes the specification of a single model of oligopoly impossible. Subscribe Thanks. These companies are able to differentiate their products e. Cost-plus pricing is very useful for firms that produce a number of different products, or where uncertainty exists. Non-price strategies Non-price competition is the favoured strategy for oligopolists because price competition can lead to destructive price wars — examples include: Trying to improve quality and after sales servicing, such as offering extended guarantees. Its actual demand curve may be something different. When a few large firms already exist in this type of market, any new competitor will be smaller and therefore have higher average costs of production.

Sometimes it pays to go first because a firm can generate head-start profits. Consequently, the industry is dominated by two firms.

types of oligopoly

In the long-run, the oligopolist will leave the industry, unless he can make a profit or at least to break even by making the best scale of plant to produce the anticipated best long-run level of output. Although explicit communication about prices is illegal, the firms might tacitly agree that whenever one station raises its prices, the other two will follow suit.

Advantages of oligopoly

In short, changing price is too risky to undertake. Will rivals be able to copy the strategy? Now, we may suppose, on the other hand, that the company alone reduces its price. Increasing returns to scale is a term that describes an industry in which the rate of increase in output is higher than the rate of increase in inputs. The gas station that first raises its prices, and that the other two follow, is called the price leader. Cost-plus pricing is a straightforward pricing method, where a firm sets a price by calculating average production costs and then adding a fixed mark-up to achieve a desired profit level. Fourthly, the model rules out the possibility of price and output fluctuations due to cost changes. Thirdly, the kinked demand curve is said to be subjective — it is what the firm thinks. Without any way to communicate, all three will lower their prices in an attempt to capture the entire market, stopping only when marginal cost equals marginal revenue. Pepper Snapple Group, and PepsiCo. When one firm changes its price or level of output, other firms are directly affected. For example, contracts between suppliers and retailers can exclude other retailers from entering the market. Additional sources of barriers to entry often result from government regulation favoring existing firms. Because of the uncertainty in the market informal and formal collusive behaviour can common feature of many oligopolistic markets.

Because of the uncertainty in the market informal and formal collusive behaviour can common feature of many oligopolistic markets.

The most important aspect of oligopoly market is reaction of rival films.

Oligopoly graph

One way in which firms achieve this is price leadership, in which one firm serves as an industry leader and sets prices, while other firms raise and lower their prices to match. Whether to raise or lower price, or keep price constant. Even when MC moves out of the vertical portion, the effect on price is minimal, and consumers will not gain the benefit of any cost reduction. The disadvantages of oligopolies Oligopolies can be criticised on a number of obvious grounds, including: High concentration reduces consumer choice. If colluding, participants act like a monopoly and can enjoy the benefits of higher profits over the long term. Develop the explanation Oligopoly is best defined by the conduct or behaviour of firms within a market and this behaviour is often complex - there are many different models of oligopolistic decision-making. Ownership or control of a key scarce resource Owning scarce resources that other firms would like to use creates a considerable barrier to entry, such as an airline controlling access to an airport. Rather, it seeks to explain why, once a price-quantity combination has been arrived at, it is not changed frequently. The EU has recently fined businesses involved in price fixing in the soap powder industry who agreed to raise prices even though they had all made their products smaller for the consumer. They may also operate a limit-pricing strategy to deter entrants, which is also called entry forestalling price. Now it is quite clear that an oligopolist with such a competitive response pattern will be extremely reluctant to change its price.
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Prerequisites of Oligopoly