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Oligopoly

is a market structure or an industry characterized by:


few sellers and many buyers
either a homogeneous or a differentiated product
(ex. Cars are differentiated products produced in an oligopolistic market)
difficult market entry/ significant barriers to entry
few sellers
bulk of market supply is in the hands of a relatively few large firms who sell
their products to many small buyers
Oligopoly is a consequence of mutual interdependence, a condition in which an action of one
firm may cause a reaction from other competing firms in the industry
homogeneous or differentiated products
products offered by suppliers maybe identical or, more commonly, differentiated
from each other in one or more respects
differences maybe physical, functional features, or purely imaginary
difficult entry
there are barriers to entry which make it very difficult for new firms to enter
and compete in the market

examples of barriers include:


control over essential resource
exclusive financial requirements
patent rights
economies of scale
Kinked Demand Curve
basically, the demand curve for the product of oligopolists has two segments:
one is elastic and the other is inelastic.
Assumption for kinked demand curve: if a single firm lowers price, other firms will follow,
But if a single firm raises price, other firms will not follow
Increase in demand will be minimal

Oligopoly usually exhibits the following features:


product branding each firm in the market is selling a branded (differentiated) product
entry barriers significant entry barriers into the market prevent the dilution of competition
in the long run
it is possible for many smaller firms to operate on the periphery of an oligopolistic market,
but none of them is large enough to have any significant effect on market prices and output
interdependent decision-making interdependence means that firms must take into account
likely reactions of their rivals to any change in price, output or forms of non-price competition.
non-price competition competitive strategies as follows:
free deliveries and installation
extended warranties and credit facilities
longer opening hours
branding of products and heavy spending on advertising
extensive after sales service
expanding into new markets plus diversification of the product range

Price leadership
another type of oligopolistic behaviour
when one firm has a clear dominant position in the market and firms with lower
market shares follow the pricing changes prompted by the dominant firm

Tacit collusion
occurs when firms undertake actions that are likely to minimize competitive response
(avoiding price cutting or not attacking each others market)
Explicit collusion
price fixing agreements or cartels
aim of this is to maximize joint profits and act as if the market was a pure monopoly
Price fixing
an attempt by suppliers to control supply and fix price at a level close to the level
we would expect from a monopoly
producers exert control over market supply

Possible break-down of cartels


enforcement problems
each individual member of the cartel finds it profitable to raise its own production
falling market demand
this creates excess capacity in the industry and puts pressure on individual
firms to cut prices to maintain their revenue
successful entry of non-cartel firms in the industry