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Oligopoly:

Oligopoly is a market form in which a market or industry is dominated by a small number of sellers which is oligopolists. Oligopolies can result from various forms of collusion which reduce competition and lead to higher costs for consumers. With few sellers, each oligopolist is likely to be aware of the actions of the others. The decisions of one firm therefore influence and are influenced by the decisions of other firms. Strategic planning by oligopolists needs to take into account the likely responses of the other market participants. Example of Oligopoly: Industries which are examples of oligopolies include:

Steel industry Aluminum Film Television Cell phone Gas

Businesses that are part of an oligopoly share some common characteristics:

They are less concentrated than in a monopoly, but more concentrated than in a competitive system.

There is still competition within an oligopoly, as in the case of airlines. Airlines match competitors air fares when sharing the same routes. Also, automobile companies compete in the fall as the new models come out. One will reduce financing rates and the others will follow suit. The businesses offer an identical product or services.

This creates a high amount of interdependence which encourages competition in non price-related areas, like advertising and packaging. The tobacco companies, soft drink companies, and airlines are examples of an imperfect oligopoly.

Classificaton of Oligopoly:
Oligopoly are classified either as Pure oligopoly or Differentiated oligopoly. If the products produced by the various firms are identical,we have pure oligopoly.

This model is found in some of the capital goods industries,such as the cement and the oil industry. Differentiated oligopoly on the other hand,exist in industries where products are not homogeneous.

This model is found in most manufactured consumer goods.The car industry and the appliance industry are examples of differentiated oligopoly.

Collusion versus Independent Action:


Oligopoly situations usually invite collusion,or a secret agreement between two or more persons or institutions to achieve certain objectives among the industrys firms. Collusion involves direct negotiation and agreement among competition.There are at least three major incentives leading oligopolistic firms toward collusion. 1)they can increase their profits if they can decrease the amount of competition among themselves and act monopolistically 2)Collusion can decrease oligopolistic uncertainty 3)Collusion among the firms already in an industry will facilitate blocking newcamers from that industry.

Perfect Collusion:
A cartel,or a formal organization of the producers within a given industry,is an example of perpect collusion among the sellers in an industry.A good example of a cartel is the Organization of Petroleum Exporting Countries(OPEC). Cartel,in ordel to be successful and effective,must posses the following characteristic: 1)All producers or sellers in the industry are included in the agreement 2)The agreement is definite and enforceable on all parties to it

3)It covers both the price to be charged and the quantity of output is be produced by each agreeing seller,the output allocation being calculated as to minimize the aggregate cost of producing the total output of the industry 4)It also include a formula for distributing the pro its of the combined operations among the agreeing parties,and 5)All parties adhers rigorously to the terms of agreement

Imperfect Collusion:
Imperfect collusion is made up mostly of tacit informal arrangement under which the firms of an industry seek to establish prices and outputs.Usually,gen tlemens agreements of varios sorts affecting pricing,output,distribution,market sharing and other activities within the industry can be worked out Collusion of this type results from the failure to meet one or more of the characteristics of perfect collution as mentioned previously.This variation can come about basically in the following ways. 1)Incompletely observed collution,there is a collusion agreement among existing sellers either formal or tacit,aired at fixing prices or output,but is not rigorously observed some or all of the sellers 2)Collusion with indefinite terms of agreement among sellers affecting prices or output,but its terms are ether ambiguous or ambiguously understood by some or all sellers. 3)Collusion with incomplete participation of the sellers in the industry 4)Interdependent action without agreement.

The Centralized Cartel:


The centralized cartel is an example of collusion in its most complete form.Its purpose is monopolistic maximation of industry profits by the few firms in the industry.

The OPEC Oil Cartel:


Organization of the Petroleum Exporting Countries is an oil cartel whose mission is to coordinate the policies of the oil-producing countries. The goal is to secure a steady income to the member states and to secure supply of oil to the consumers. OPEC is an intergovernmental organization that was created at the Baghdad Conference on 10-14 September 1960, by Iraq, Kuwait, Iran, Saudi Arabia and Venezuela. Later it was joined by nine more governments: Libya, United Arab Emirates, Qatar, Indonesia, Algeria, Nigeria, Ecuador, Angola, and Gabon. OPEC was headquartered in Geneva, Switzerland before moving to Vienna, Austria, on September 1, 1965.

Kinked demand curve model:


According to this model, each firm faces a demand curve kinked at the existing price. The conjectural assumptions of the model are; if the firm raises its price above the current existing price, competitors will not follow and the acting firm will lose market share and second if a firm lowers prices below the existing price then their competitors will follow to retain their market share and the firm's output will increase only marginally. If the assumptions hold then: The firm's marginal revenue curve is discontinuous (or rather, not differentiable), and has a gap at the kink[18] For prices above the prevailing price the curve is relatively elastic For prices below the point the curve is relatively inelastic

The gap in the marginal revenue curve means that marginal costs can fluctuate without changing equilibrium price and quantity.[18] Thus prices tend to be rigid.

Sales and Profit of Oligopolies:


The point of view of profitability a market characterized by monopoly is the most desirable for the producer.In a monolopy,there is only one producer,thus,profits are exclusively his.In addition,there are no competitors in a monopolistic market

Barriers to entry:
Oligopolies and monopolies may maintain their position of dominance in a market because it is too costly or difficult for potential rivals to enter the market. Obstacles to entry are called barriers to entry. They can be erected deliberately by the incumbent called artificial barriers or they can exploit barriers that naturally exist in the market, also called natural barriers.

Welfare effects of Oligopoly:


Oligopolistic market structures,as compared with purely competitive market structures,would be expected to have adverse effect on consumer welfare.The problems are essentially the same as those brought about by pure monopoly.Output restriction,internal inefficiency of the firm are losses to consumer welfare.There may,haowever,he some welfare gains from product differentiation

Output Restriction:
An oligopolistic firm ordinarily faces a demand curve for its output that is down-wardslopping to the right,or that is less than perfectly elastic.As a consequence,marginal revenue at each level of sales is less than the price.and since the profit maximizing firm produses the output level at which marginal revenue equals marginal cost,marginal cost will be less than the product price

Range of Production:
Differentiated oligopoly provides each consumers with a broader range of products among which to choose than does either pure competition or pure monopoly.Rather than being limited to a single king and quality of say automobiles,each consumercan choose the kind and quality that best suits individual needs and income Gradation in product qualities with each lower quality selling at a correspondingly lower price,increase the divisibility of the consumers purchases of particular items.

Chapter 10

Oligopoly
Reported by: Jayrald Almarez Marvin Cubol Narbel Rosales