Each firm produces a significant portion of the total output. Oligopoly : Oligopoly is a market situation in which there are a few firms selling homogeneous or differentiated products. Though, it is rare to find pure oligopoly situation, yet, cement, steel, aluminum and chemicals producing industries approach pure oligopoly. The main difference is that, in a perfectly competitive market place, the product is simpler and can be produced and sold by anyone; therefore there are fewer barriers to entry. The abnormal profits of the short run are driven to zero due to the feature of free entry. Now, those assumptions are a bit closer to reality than the ones we looked at in perfect competition. Price leadership in oligopoly occasionally breaks down and sometimes results in a price war.
We also assume free entry and exit from the industry in the long-run. Concentration Ratio - low The percentage of the total sales of an industry made by the four or some other number largest sellers in the industry. Few barriers to entry 2. Since there are less number of firms, any action taken by one firm has a considerable effect on the other. When companies work together to control an oligopoly it is often illegal. There is only one supplier who has significant market power and determines the price of its product.
Concentration ratio The four-firm concentration ratio gives the percentage of total industry sales accounted for by the four largest firms B. Examples of monopolistic competition are toothpaste and cigarette manufacturers. Market Structure and Imperfect Competition 8. In the long-run, these profits attract new entrants, who dilute the market share of each firm in the industry, shifting their demand curves to the left. The following assumptions are made when we talk about monopolies: 1 the monopolist maximizes profit, 2 it can set the price, 3 there are high barriers to entry and exit, 4 there is only one firm that dominates the entire market.
Unfortunately, it is not clearly defined what a «few» firms means exactly. International trade allows each country to specialise in a few types of car and produce a much larger output of that brand than the home market can support. We know that total industry profits are maximised by behaving as a collusive monopoly and setting all prices at P m. Entry and Exit of Firms Difficult: Because there is keen competition in an oligopolistic industry, there are no barriers to entry into or exit from it. Oligopoly An oligopoly describes a market structure which is dominated by only a small number firms.
No Standard Model But Common Pricing Characteristics 1. Product differentiation is generally external—caused by packaging, external looks, or simply by brand positioning. Imperfect competition — Oligopsony When there are many sellers but very few buyers — like a monopsony, but with more than one buyer. We examine another form of market structure called cartel; where some or all firms explicitly collude — they cooperate their output levels and prices to maximise their joint profits. Duopoly often starts with price wars and ends up ultimately with price collsion.
Allocative and Productive Efficiency Allocative and productive efficiency are not realized because price will exceed marginal cost and, therefore, output will be less than minimum average-cost output level 1. Because of the small number of firms, a singular firm has the power to influence market prices; in fact, , an underhanded tactic in which competing firms join forces to prices, has historically been rampant in oligopolies. Non-Price Competition Oligopolies tend to compete on terms other than price. An oligopoly is an industry with only a few firms, each recognizing that its own price depends not merely on its own output but also on the actions of its competitors. Whereas the Oligopoly is said to be imperfect, when the firms deal in heterogeneous products, i. Negbennebor, A: Microeconomics, The Freedom to Choose page 299. To find the Cournot—Nash equilibrium one determines how each firm reacts to a change in the output of the other firm.
According to game theory, the decisions of one oligopolist influences and are influenced by the decisions of all the others. Auto manufacturers are a good example of an oligopoly, because the fixed costs of automobile manufacturing are very high, thus limiting the number of firms that can enter into the market. . Perfect competition across a whole economy does not exist. This practice is followed to reap maximum revenue, to dispose of the excess stock or to capture foreign markets.
A good example of an oligopolistic market place would be the gas industry where a few number of sellers offer the same product to a large number of buyers. This measure expresses, as a percentage, the market share of the four largest firms in any particular industry. A has pricing power within the market. Patents, requirement of large capital, control over crucial raw materials, etc, are some of the reasons, which prevent new firms from entering into industry. By swapping these cars between countries, it is possible to give consumers a wider range of choice while allowing each individual producer to enjoy economies of scale and hold prices down. The advertiser intends to retain its market share through persuasive advertising.