Oligopoly Assignment
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An oligopoly is a market structure with a small number of producers that have strategic interdependence. Each firm must consider how its rivals will respond to its pricing and output decisions. While firms have an incentive to collude to raise prices above competitive levels, maintaining collusion can be difficult without formal agreements. As more firms enter the market, it becomes harder to collude and prices tend to approach competitive levels. Firms in an oligopoly often engage in tacit collusion through mechanisms like price leadership.
Oligopoly Assignment
- 1. OLIGOPOLY Introduction: An oligopoly is a market demanded by a few producers, each of which has control over the market. It is an industry where there is a high level of market concentration. However oligopoly is a best defined by the conduct of firms within a market rather than it’s market structure. Oligopoly: An oligopoly is a situation where a few firms, with or without differentiated products dominates the market. The reason for the small number of companies is the extremely high cost of entering the industry. Because there are a few firms, there is little incentive to compete based on price. The Nature of Oligopoly: A Markets form where there are only a few firms in the industry but there are many buyers." - Producers - Buyers - Products - Mutual Interdependence - Price - Competition - Relationship between firms - Economic Scale Oligopolistic Market: As a market characterized by a small number of producers who often act together to control the supply of a particular good and its market price. e.g Motor van, Isfat, Elumenium, Medicine, Electronic equipment, computer equipment etc. Characteristics: Few sellers offering similar or identical products Interdependent firms Best off cooperating and acting like a monopolist by producing a small quantity of output and charging a price above marginal cost.
- 2. The Kinked Demand Curve: An oligopolist who believes she will lose a substantial number of sales if she reduces output and increases her price but will gain only a few additional sales if she increases output and lowers his price, away from the tacit collusion outcome, faces a kinked demand curve. It illustrates how tacit collusion can make an oligopolist unresponsive to changes in marginal cost within a certain range when those changes are unique to her. Figure: The Kinked Demand Curve. COMPARISON: Oligopoly Monopoly Perfect Competition Monopolistic Competition Innovative/ creative Expand to much Undifferentiated product Advertise and introduce consumer to spend more. Few firms Experience diseconomy of scale Consumers has limited product No control in price Greater efficiency Increase in Ac Boring Consumers suffer more No competition, No innovation Advantages: Since there is few numbers of firms of producing a given product, they are competition and competition into production of quality products and services. There is also a high degree of collusion which results into combined efforts to produce better services. The oligopolist also believes that if she lowers her output and raises his price her rivals will refuse to reciprocate and will steal a substantial number of her customers, leading to a large fall in sales. So her demand curve is very flat to the left of Q*. The kink in the demand curve leads to the break XY in the marginal revenue curve.
- 3. There is availability of information is a little bit easy in terms of costs as compared to a monopoly market structure the level of advertisement is high and persuasive, this provides information to consumers, suppliers retailers etc at easily. In such an industry there is easier entry and exit which is quiet better than that of monopoly which is blocked. The nature of products and services produced appear to be differentiated in such a way they create variety, this could due to branding and change of shape though the product remains the same. lastly but not the list there major goal is profit maximization they easily reach this goal low Disadvantages: 1. Freedom of entry is restricted. 2. Consumer can’t control this market. 3. Sometimes consumer pays more money for the oligopoly’s product. 4. those who enter the oligopoly he must be millionaire. Size of an Oligopoly and Market Outcome: 1. How increasing the number of sellers affects the price and quantity: • The output effect: Because price is above marginal cost, selling more at the going price raises profits. • The price effect: Raising production lowers the price and the profit per unit on all units sold. 2. As the number of sellers in an oligopoly grows larger . . . • The market looks more and more like a competitive market. • The price approaches marginal cost. • The quantity produced approaches the socially efficient level. Oligopoly in Practice: The Legal Framework- Oligopolies operate under legal restrictions in the form of antitrust policy. But many succeed in achieving tacit collusion. Tacit collusion is limited by a number of factors, including large numbers of firms, complex pricing, and
- 4. conflicts of interest among firms. Why People Sometimes Cooperate Firms in oligopolies have a strong incentive to collude in order to reduce production, raise prices, and increase profits. Firms that care about future profits will cooperate in repeated games rather than cheating in a single game to achieve a one-time gain. Conclusion: An oligopoly may end up looking more like a monopoly or a competitive market, depending on the number of firms. There is no certainty in how firms will compete in Oligopoly; it depends upon the objectives of the firms, the contestability of the market and the nature of the product.