Oligopoly refers to a market composition, which is characterized by a small number of large organizations. The firms in the market produce similar products and development is concentrated to some dominant firms on the market. The few organizations take a considerable market share resulting in a high amount of market concentration. Among oligopolistic markets in the United States includes petroleum, material, aluminum, and beverage industries.
There are two major categories of oligopolies: the homogenous and differentiated oligopoly. The homogenous oligopoly is made up of a few dominating firms interacting with identical products (Varian, 2009). The firms tend to bill uniform prices, and competition between them is little; they have a tendency towards building oligopolistic cartels. Among homogenous oligopoly is the metal and lightweight aluminum industry. Alternatively, differentiated oligopolies offer in similar but differentiated products (Varian, 2009; McConnell, Brue, and Flynn, 2010). Among differentiated oligopoly is the auto, soda, and cigarette companies. Companies in the differentiated oligopoly compete by differentiating their products to distinguish them from those of their challengers. The differentiation is carried out to the degree that the firms are able to produce distinctive products and fee differentiated prices.
In the competitive market, organizations act to increase their gains (Varian, 2009). However, in the oligopolistic market, businesses must consider their activities on the other players on the market. The small companies in the market may take action without leading to any results on the large organizations; however, the activities of the dominating firms will cause the other players in the market to behave (Bergstrom, and Varian, 2010). For instance, if a prominent firm in the market tries to undercut the other organizations by providing at a lesser price, the other organizations will learn of the action and react by reducing their prices. Thus, a reduction in price, though a competitive strategy in the oligopolistic market, it will reduce the revenue attained by all the firms on the market.
Oligopolistic market segments have unpredictable prices to the magnitude that companies have a tendency to reduce their prices in order to gain a competitive border. However, in many countries, collusion by companies to repair prices is illegal. Thus, oligopolistic organizations are forced to reach industry-pricing agreements indirectly. Organizations in oligopolistic marketplaces signal their costing decisions in various ways; such strategies include speeches by industry market leaders, pr announcements, or interview commentary.
Oligopolies tend to be set up in market sectors, which require high first capital outlay. Establishments that have a higher four-firm concentration proportion have higher income in comparison to other companies. Therefore, companies establish an oligopoly and maintain it by discouraging potential traders from establishing competing companies. Oligopolies curtail new assets in various ways; they include limiting the access of key resources, which might be either a natural resource or a trademarked process (Mas-Colell, Whinston, and Green, 1995; Varian, 2009). New organizations are not able to enter the marketplace without usage of the reference.
Firms in an oligopolistic market enjoy significant cost advantages. This curtails new companies from venturing into the market. The price advantage may derive from economies of large-scale creation as well as the knowledge of preserving low development and manufacturing costs. Oligopolies also maintain their dominance due to the difficulty of launching a fresh product into an oligopoly, which is typified by a high range of product differentiation. Prohibitively huge assets would be required by the new companies to coax the prevailing clients to try the new product; clients are often unwilling to try new products. Lastly, oligopolies maintain their dominance through predatory routines such as protecting lower prices from suppliers, instituting exclusive dealerships, and executing predatory rates, which is aimed at driving competitors from the market.
Characteristics of your Oligopoly
Profit maximization: Oligopolies take full advantage of their gains at the point where marginal income equal the marginal costs of development (Pindyck and Rubinfeld, 2001).
Kinked Demand Curve
Firms operating within an oligopolistic market operate at the stage where MC identical MR, this is irrespective of whether marginal costs increase or reduce. Inside the above graph, when the marginal cost increases slightly, the income making the most of price and result remains at point Po and Qo. On the contrary, if marginal cost lowers just a little, the profit-maximizing price and end result remains at point Po and Qo.
Ability to create prices: Firms within an oligopolistic market are price setters somewhat than price takers.
Lack of free access and exit: There are various barriers of access and exit. The obstacles of entrance include all he measures that the firms in the industry employ to maintain their dominance in the market.
Long run profits: Oligopolies have the ability to maintain abnormal profits over time because of the barriers of entrance on the market. Barriers of access prevent competition, and invite the organizations to earn irregular profits even over time (Mas-Colell, Whinston, and Green, 1995).
Product differentiation: There are two main products: homogeneous products such as lightweight aluminum and metal, and differentiated products such as cars and smokes.
Perfect knowledge: The assumption of perfect knowledge is assorted; however, the data of various economic actors is generally selective. Oligopolies have a perfect understanding of their development and cost functions; however, they posses imperfect information on the inter-firm activities. Furthermore, buyers come with an imperfect understanding of the costs, cost, and quality of the merchandise.
Interdependence: A couple of dominant businesses characterize Oligopoly market segments. The organizations are so large that their individual actions impact the conditions on the market. Thus, competing companies are aware of all the market actions of other businesses and they embark on appropriate options. Therefore, all the organizations within an oligopoly market are pressured to contemplate the counter-top actions with their opponents before they can take on any action.
In final result, few dominant organizations characterize a duopoly. These companies must take into account the counter-actions of their competitors before executing any action due to the high interdependence prevailing in the market. Changes in prices have an effect on the decisions of the key players on the market. Demand is more flexible to price raises compared price decreases, a company increasing its prices is more likely to reduce clients to its competition since the competition are unlikely to match the price increase. Alternatively, demand is less flexible to price decrease since competing firms will match the purchase price cut down. Therefore, oligopolistic companies are torn between two major options: cooperating to maximize their revenue by establishing a monopoly or contending between themselves to gain a competitive border (Pindyck and Rubinfeld, 2001; Krugman and Wells, 2004).
