Oligopoly

An oligopoly describes a market situation in which there are limited or few sellers. Each
seller knows that the other seller or sellers will react to its changes in prices and also
quantities. This can cause a type of chain reaction in a market situation.  In the world
market there are oligopolies in steel production, automobiles, semi-conductor
manufacturing, cigarettes, cereals, and also in telecommunications.  

Often times oligopolistic industries supply a similar or identical product.   These

companies tend to maximize their profits by forming a cartel and acting like a monopoly.
A cartel is an association of producers in a certain industry that agree to set common
prices and output quotas to prevent competition.   The larger the cartel, the more likely it
will be that each member will increase output and cause the price of a good to be lower.

  The majority of time an oligopoly is used describe a world market; however, the term
oligopoly also describes conditions in smaller markets where a few gas stations, grocery
stores or alternative restaurants or establishments dominate in their fields.   A
distinguishing characteristic of an oligopoly is the interdependence of firms.   This
means that any action on the part of one firm with respect to output, price, or quality will
cause a reaction on the side of other firms.  
Many times an oligopoly leads to price leadership between many firms.   A price
leadership is the practice in many oligopolistic industries in which the largest firm
publishes its price list ahead of its competitors.   Then these competitors feel the need
to match those announced prices so they lower their prices.   This is also termed a
parallel pricing.
What is an Oligopolistic Market ?
An oligopolistic market is the one which is dominated by some large suppliers. In an
oligopolistic market, the leading firms account for a large percentage of market share.
Firms manufacture branded products and high competition among them results in
tremendous advertising and marketing spends by these firms. Leading forms are able to
make abnormal profits in the long run, as new firms have numerous entry barriers. As
all firms in an oligopolistic market are interdependent, they need to consider impact and
reactions on other firms while determining their own pricing and investment policies.
Homogeneous products, mutual interdependence, few large producers and high entry
barriers are oligopoly characteristics prevalent in such markets.

The car automobile industry is a very good example of an oligopolistic market. There
are various competitors in this market but the dominant ones include General Motors,
Honda, Chrysler, Toyota and Ford. Entry barriers prevent other entrants and pricing is
mostly by competition and mutual understanding between top manufacturers.

What are the Characteristics of

Oligopoly?
The three most important characteristics of oligopoly include:

 Industry dominance by few large firms

 Products sold by these firms are either differentiated or
identical in nature
 Various entry barriers depending upon the industry
Few Large Firms-
This is a very crucial oligopoly characteristic which states that these markets include
few large firms which are dominant in existence, and each one of these firms is
comparatively larger than the market size. This particular oligopoly characteristic
ensures that all large firms have a fair amount of market control, not seen in a monopoly
market. In spite of there being other smaller firms in the market, the major ones account
for more than half of the total industry output. For example, in a hypothetical
telecommunications market, out of the 25 firms doing business the top 5 firms are
responsible for 65% of the total industry sales, while the figure shoots up to 80% if the
top 10 firms are taken into consideration.

Homogeneous or Differentiate Products

Certain industries in an oligopolistic market manufacture homogeneous products, like in
a perfect competition market, while others manufacture differentiated products like in an
monopolistic market. It can thus be inferred that oligopolistic markets are found in two
separate categories:

1. Homogeneous Product Oligopoly: Industries in these

markets produce intermediate goods which are use by
other different industries later on for manufacturing their
products. Examples include – steel, petroleum and
aluminum industries.

2. Differentiate Product Oligopoly: Goods manufactured in

these kinds of markets are for personal consumption.
Consumers need a variety of products, as they have
different needs and wants. Examples include –
computers, household products and automobile industry.
Entry Barriers-
Entry barriers helps existing firms to exercise market control. Government restrictions,
copyright issues, huge setup cost and undivided resource ownership are common
barriers to entry. This particular feature also helps in differentiating an oligopolistic
market from a monopolistic market, as new firms can enter a monopolistic market and
reduce dominance of the large firm. For example, if a new firm tries to enter the
hypothetical telecommunications market discussed earlier it will have to compete
against already existing brand names, set-up a manufacturing unit without any initial
sales or income from the business and will also need to come up with innovative
production techniques to sustain it self in the long run. All these barriers make it difficult
for the new entrant to enter the oligopolistic market, irrespective of the product.

Apart from this, few other oligopoly characteristics include – tendency to keep price
rigid, practice of non-price competition, inclinations towards mergers or collaborations
and decision making through mutual consent.

Characteristics of Oligopoly-
1. Few Sellers : An oligopoly market is characterized by a few sellers and their
number is limited . (usually not more than 10) Oligopoly is a special type of imperfect
market. It has a large number of buyers but a few sellers.

2. Homogeneous or Differentiated Product : The Oligopolists produce either

homogenous or differentiated products. Products may be differentiated by way of design
, trademark or service.
3. Interdependence : The most important feature of the Oligopoly is the
interdependence in decision making of the few firms which comprise the industry.

The reactions of the rival firms may be difficult to guess. Hence price is indeterminate
under Oligopoly.

4. High Cross Elasticities : The cross elasticity of demand for the products of oligopoly
firms is very high. Hence there is always the fear of retaliation by rivals.

Each firm is conscious about the possible action and reaction of competitors while
making any change in price or output

5. Importance of Advertising and Selling costs : A direct effect of interdependence of the

Oligopolistic firms is that they have to employ various aggressive and defensive
marketing weapons to gain greater share in the market or to maintain their share.

Hence, the firms will have to incur a good deal of costs on advertising and other
measures or sales promotion .

6. Competition : Competition is unique in an oligopoly market. It is a constant struggle

against rivals.

7. Different size : The size of firm in an oligopoly market. It is a constant struggle against
rivals.

8. Group Behaviour : Each Oligopolist closely watches the business behaviour of other
Oligopolists in the industry and designs his moves on the basis of some assumptions of
their behaviour .

9. Uncertainty : The interdependence of other firms for one’s own decision creates an
atmosphere of uncertainty about price and output

10. Price Rigidity : In an oligopoly market each firm sticks to its own price to avoid a
possible price war. The price remains rigid because of constant fear of retaliation from
rivals.
Conclusion-

            Oligopoly is a market system wherein few companies operate and compete in a
certain industry. Compared to other market forms, oligopoly has dual features of both
monopoly and competition systems. Through its monopolistic features, oligopolists are
able to operate with less rivals; this in turn allow them to obtain considerable shares of
the market. This also helps in limiting the level of competition observed in the market,
making business progress faster among limited firms. The presence of competition on
the other hand, helps in preventing oligopoly from market failure. Although the power to
operate is only distributed to a few oligopolists, the competition factor encourages them
to produce quality goods and services. This also drives them to become innovative and
customer-oriented. The efficiency gains of an oligopolistic system is then concentrated
on the fact that both operators and consumers benefit from this type of market system.
In turn, the presence of both monopolistic and competitive features in oligopoly creates
a balanced system, making it an ideal market structure.

P.T.O.
Oligopolistic Company-(Ford

Motors)

History of Ford Motor Company-

Ford Motor Company is an American multinational corporation and the world's fourth
largest automaker based on worldwide vehicle sales. Based in Dearborn, Michigan, a
suburb of Detroit, the automaker was founded by Henry Ford, and incorporated on June
16, 1903. Ford now encompasses several brands, including Lincoln and Mercury.
 Ford was launched in a converted factory in 1903
with $28,000 in cash from twelve investors, most notably John and Horace Dodge, who
would later found the Dodge Brothers Motor Vehicle Company. Henry Ford was 40
years old when he founded the Ford Motor Company, which would go on to become

one of the largest and most profitable companies in the

world, as well as being one of the few to survive the Great Depression. The largest
family-controlled company in the world, the Ford Motor Company has been in
continuous family control for over 100 years.
The first Ford factory on Bagley Street, Detroit.

During its early years, the company produced a range of vehicles designated,
chronologically, from the Ford Model A (1903) to the Model K and Model S (Ford's last
right-hand steering model) of 1907. The K, Ford's first six-cylinder model, was known as
"the gentleman's roadster" and "the silent cyclone", and sold for US$2800; by contrast,
around that time, the Enger 40 was priced at US$2000, the Colt Runabout US$1500,
the high-volume Oldsmobile Runabout US$650, Western's Gale Model A US$500, and
the Success hit the amazingly low US$250.

The next year, Henry Ford introduced the Model T. Earlier models were produced at a
rate of only a few a day at a rented factory on Mack Avenue in Detroit, Michigan, with
groups of two or three men working on each car from components made to order by
other companies (what would come to be called an "assembled car"). The first Model Ts
were built at the Piquette Road Manufacturing Plant, the first company-owned factory. In

its first full year of production, 1909, about 18,000 Model

Ts were built. As demand for the car grew, the company moved production to the much
larger Highland Park Plant, and in 1911, the first year of operation there, 69,762 Model
Ts were produced, with 170,211 in 1912. By 1913, the company had developed all of
the basic techniques of the assembly line and mass production. Ford introduced the
world's first moving assembly line that year, which reduced chassis assembly time from
12½ hours in October to 2 hours 40 minutes (and ultimately 1 hour 33 minutes), and
boosted annual output to 202,667 units that year. After a Ford ad promised profit-
sharing if sales hit 300,000 between August 1914 and August 1915, sales in 1914
reached 308,162, and 501,462 in 1915, by 1920, production would exceed one million a
year.

These innovations were hard on employees, and turnover of workers was very high,
while increased productivity actually reduced labor demand. Turnover meant delays and
extra costs of training, and use of slow workers. In January 1914, Ford solved the
employee turnover problem by doubling pay to $5 a day, cutting shifts from nine hours
to an eight hour day for a 5 day work week (which also increased sales; a line worker
could buy a T with less than four months' pay), and instituting hiring practices that
identified the best workers, including disabled people considered unemployable by other
firms. Employee turnover plunged, productivity soared, and with it, the cost per vehicle
plummeted. Ford cut prices again and again and invented the system of franchised
dealers who were loyal to his brand name. Wall Street had criticized Ford's generous
labor practices when he began paying workers enough to buy the products they made.
 Recent company
developments
During the mid to late 1990s, Ford sold large numbers of vehicles, in a booming
American economy with soaring stock market and low fuel prices. With the dawn of the
new century, legacy healthcare costs, higher fuel prices, and a faltering economy led to
falling market shares, declining sales, and sliding profit margins. Most of the corporate
profits came from financing consumer automobile loans through Ford Motor Credit
Company.

By 2005, corporate bond rating agencies had downgraded the bonds of both Ford and
GM to junk status, citing high U.S. health care costs for an aging workforce, soaring
gasoline prices, eroding market share, and dependence on declining SUV sales for
revenues. Profit margins decreased on large vehicles due to increased "incentives" (in
the form of rebates or low interest financing) to offset declining demand.

In the face of demand for higher fuel efficiency and falling sales of minivans, Ford
moved to introduce a range of new vehicles, including "Crossover SUVs" built on
unibody car platforms, rather than more body-on-frame chassis. In developing the
hybrid electric powertrain technologies for the Ford Escape Hybrid SUV, Ford licensed
similar Toyota hybrid technologies to avoid patent infringements. Ford announced that it
will team up with electricity supply company Southern California Edison (SCE) to
examine the future of plug-in hybrids in terms of how home and vehicle energy systems
will work with the electrical grid. Under the multi-million-dollar, multi-year project, Ford
will convert a demonstration fleet of Ford Escape Hybrids into plug-in hybrids, and SCE
will evaluate how the vehicles might interact with the home and the utility's electrical
 grid. Some of the vehicles will be evaluated "in typical
customer settings," according to Ford. In December 2006, the company raised its
borrowing capacity to about $25 billion, placing substantially all corporate assets as
collateral to secure the line of credit.

Chairman Bill Ford has stated that "bankruptcy is not an option". In order to control its
skyrocketing labor costs (the most expensive in the world), the company and the United
Auto Workers, representing approximately 46,000 hourly workers in North America,
agreed to a historic contract settlement in November 2007 giving the company a
substantial break in terms of its ongoing retiree health care costs and other economic
issues. The agreement includes the establishment of a company-funded, independently
run Voluntary Employee Beneficiary Association (VEBA) trust to shift the burden of
retiree health care from the company's books, thereby improving its balance sheet. This
arrangement took effect on January 1, 2010. As a sign of its currently strong cash
position, Ford contributed its entire current liability (estimated at approximately US$5.5
Billion as of December 31, 2009) to the VEBA in cash, and also pre-paid US$500 Million
of its future liabilities to the fund. The agreement also gives hourly workers the job
security they were seeking by having the company commit to substantial investments in
most of its factories.

The automaker reported the largest annual loss in company history in 2006 of $12.7
billion, and estimated that it would not return to profitability until 2009. However, Ford
surprised Wall Street in the second quarter of 2007 by posting a $750 million profit.
Despite the gains, the company finished the year with a $2.7 billion loss, largely
attributed to finance restructuring at Volvo.
 On June 2, 2008, Ford sold its Jaguar and Land Rover
operations to Tata Motors for $2.3 billion. In January 2008, Ford launched a website
listing the ten Built Ford Tough rules as well as a series of webisodes that parodied the
TV show COPS.During November 2008, Ford, together with Chrysler and General
Motors, sought financial aid at Congressional hearings in Washington D.C. in the face of
worsening conditions caused by the automotive industry crisis.

The three companies presented action plans for the sustainability of the industry. The
Detroit based automakers were unsuccessful at obtaining assistance through
Congressional legislation. GM and Chrysler later received assistance through the
Executive Branch from the T.A.R.P. funding provisions. On December 19, the cost of
credit default swaps to insure the debt of Ford was 68 percent the sum insured for five
years in addition to annual payments of 5 percent. That means it costs $6.8 million paid
upfront to insure $10 million in debt, in addition to payments of $500,000 per year. In
January 2009, Ford announced a $14.6 billion loss in the preceding year, making 2008
its worst year in history. Still, the company claimed to have sufficient liquidity to fund its
business plans and thus, did not ask for government aid. Through April 2009, Ford's
strategy of debt for equity exchanges, erased $9.9 B in liabilities (28% of its total), in
order to leverage its cash position. These actions yielded Ford a $2.7 billion profit in
fiscal year 2009, the company's first full-year profit in four years.
Brands and marques-
Today, Ford Motor Company manufactures automobiles under several names including
Lincoln and Mercury in the United States. Ford plans to discontinue the Mercury brand
at the end of 2010. In 1958, Ford introduced a new marque, the Edsel, but poor sales
led to its discontinuation in 1960. Later, in 1985, the Merkur brand was introduced to
market Fords from Europe in the United States; it met a similar fate in 1989.

Ford has major manufacturing operations in Canada,

Mexico, the United Kingdom, Germany, Turkey, Brazil, Argentina, Australia, the
People's Republic of China, and several other countries, including South Africa where,
following divestment during apartheid, it once again has a wholly owned subsidiary.Ford
acquired British sports car maker Aston Martin in 1989, but sold it on March 12, 2007,
retaining a small minority stake, and bought Volvo Cars of Sweden in 1999, selling it to
Zhejiang Geely Holding Group in 2010. It shares an American joint venture plant in Flat
Rock, Michigan called Auto Alliance with Mazda.. Ford also sponsors numerous events
and sports facilities around the US, most notably Ford Center in downtown Oklahoma
City and Ford Field in downtown Detroit.

So at last we conclude that ford is one of the fast rising oligopoly firm, though it is facing
a lot of tough competition from various competitors but it is finding its way out by
improving the quality of its products and also by lowering price of its products as
compred to other rivals.

A report by –

Md. Mussadique Hussain