Oligopoly – Overview

Oligopoly – Overview

The oligopoly is a market dominated by a few producers, each of which has control of the market. It is an industry and when there is ahigh level of market concentration. However, the best definition ofoligopoly through the actions (or behavior) for companies within the market rather than market structure.

Concentration measures the extent to which the market is dominated by industry or by the leading companies in the area of ​​a few. Usually when there is oligopoly top five companies in the market for more than 60% of the total market demand / sales.

Characteristics of an oligopoly

There is no one theory of how to determine prices and production companies in light of the circumstances of oligopoly. If a price warbroke out, the oligopoly price and production as it is a competitive industry completely and, at other times they act like a pure monopoly. But oligopoly usually exhibits the following features:

Product branding:

Each company in the market is the sale and described the(differentiated) product

Entry barriers:

Entry barriers to the market in great relief to prevent competition inthe long-term reserves supernormal profits of the dominantcompanies. It is quite possible for many small companies to work on the sidelines of an oligopoly market, but none of them is not enoughto have any significant impact on market prices and production

Interdependent decision-making:

Interdependence means that companies must take into account thepossible reactions of rivals to any change in production, price ornon-price forms of competition. In perfect competition and monopoly, but the producers do not have to consider when choosing a response to competitor production and prices.

Non-price competition:

Non-price competition Sa consistent feature of the competitive strategies of companies are monopolies. Examples of non-pricecompetition include the following:

v  Free deliveries and installation

v  Extended warranties for consumers and credit facilities

v  Longer opening hours (e.g. supermarkets and petrol stations)

v  Branding of products and heavy spending on advertising and marketing

v  Extensive after-sales service

v  Expanding into new markets + diversification of the product range

The kinked demand curve model of oligopoly

Kinked demand curve model first developed by economist PaulSweezy is assumed that the works were facing the demand curvefor products which are based on double the possible reactions to other companies in the market for a change in price or another variable. The prevailing assumption in the theory is that the firms in an oligopoly are looking to protect and maintain market share, and it is unlikely to match the competing companies to increase the price, but some may coincide with low prices. Any competing companieswithin the oligopoly interaction is similar to the change in the price ofanother company.

If the work is raising prices, leaving others to their prices fixed, and then we can fully expect the effect of changing away from this bigcompany which makes the price elasticity of demand is relatively.The business and then lose market share and we expect to see a decline in total revenues.

If the work is less than the price, but other companies to follow suit,and the relative price change is much smaller and the demand will be inelastic with respect to price change. Lower prices when demand is inelastic also lead to lower total revenues with little or noimpact on market share.

Kinked demand curve model thus makes the prediction that the work could reach a stable balance in the profit-maximizing prices and P1 Q1 production and do not have little incentive to changeprices.

Kinked demand curve model predicts periods of relative stability of prices under oligopoly with companies that focus on non-pricecompetition as a means to enhance its position in the market andincrease their profits overstated.

Can be short-term price wars between competing companies is still happening under the kinked demand curve model. During theprice war, companies operating in the market and trying to grab the advantage in the short term and gain market share in some extra.

There is limited evidence of the kinked demand curve model. Theorycan be criticized for not explain why firms start in the equilibrium price and quantity. But one model of how firms in an oligopoly may behave if they have to consider possible responses to their competitors.

The importance of non-price competition under oligopoly

Non-price competition is gaining increasing importance inoligopolistic markets. Non-price competition includes advertising and marketing strategies to increase demand and develop brand loyalty among consumers. The companies will use other policies toincrease market share:

1. Better quality of service including guaranteed delivery times for consumers and low-cost servicing agreements
2. Longer opening hours for retailers, 24 hour telephone and online customer support
3. Extended warranties on new products
4. Discounts on product upgrades when they become available in the market
5. Contractual relationships with suppliers - for example the system of tied houses for pubs and contractual agreements with franchises (exclusive distribution agreements)

Ad spending in runs of millions of pounds for many companies.Some simply applying the rule to maximize profit, and marketing strategies of their own. Promotional campaign is profitable if themarginal utility (or revenue) of any additional sales outweigh the cost of the advertising campaign and the marginal costs of production increase in production. However, it is not always easy to measure accurately the incremental sales arising from the specificad campaign. See other advertising companies simply as a meansto increase sales revenues. If the ad convincing lead to a shift inexternal demand, and consumers are willing to pay more for each unit consumed. This increases the consumer surplus is likely that the work had been extracted.

Spending on marketing is relatively high it is important for start-upnew business (consideration of the large sums of money and toooften are spent on marketing by COMS dot arising during theobsession with the Internet in the late 1990s and until 2000), as well as by companies seeking to break into the current market where there is consumer or brand loyalty to products in the market:

Price leadership – tacit collusion

Another type of oligopoly behavior is driving prices. This is whenone company has a clearly dominant position in the market and lower market shares follow up with the pricing changes prompted by the dominant firm. See examples of this with the major mortgage lenders and retailers, as most of the gasoline suppliersfollow the pricing strategies of leading companies. If most of the leading companies in the market prices move in the same direction, it can take some time for price differences relative to theexit, which may cause consumers to switch their demand.

And mainly engaged companies market to consumers who are"not aware of cheaper" or who claim to be monitoring and matching the lowest fares in a particular geographical area in tacitcollusion. The consumer does not really benefit from this

Explicit collusion under oligopoly

It is noted often that when the market is dominated by a few largecompanies, there is always the possibility for companies seeking toreduce the uncertainty in the market and engage in some form ofcollusion. When this happens, the existing companies to decide to enter into agreements fixing prices or gangs. The aim is tomaximize joint profits and act as if the market was pure monopoly.This behavior is illegal by the UK and European competition authorities. But it is difficult to prove that a group of companies thatdeliberately joined together to raise prices.

Price fixing

And explains the often through collusion to achieve a common desire to maximize profit through the market or to prevent theinstability of prices and revenues in the industry. Pricing is an attempt by suppliers to control the supply and installation of the price level close to the level we expect from the monopoly.

To determine prices, producers must market to be able to exercise control over the supply market. In the graph below assumes that thecartel product determine the price of OPEC production in the QMand time prices. May not allocate the distribution of gross output ofthe cartel on the basis of a quota system or another process ofnegotiation.

Although the organization as a whole is to maximize profits, andper capita output of the company is likely to be at the point ofmaximizing profits. For any single company, within the organization, and can expand production and sales price, which weakens the price of a little extra profit of the cartel. Unfortunately, ifone company does not do this, it is the interest of each company to do exactly the same thing. If you break all the companies with the terms of the cartel agreement, the result will be excess supply in the market and a sharp drop in prices. Under these circumstances, it may be to break the cartel agreement.

Collusion in a market or industry is easier to achieve when:

1. There are only a small number of firms in the industry and barriers to entry protect the monopoly power of existing firms in the long run.
2. Market demand is not too variable
3. Demand is fairly inelastic with respect to price so that a higher cartel price increases the total revenue to suppliers in the market
4. Each firm’s output can be easily monitored – this enables the cartel more easily to control total supply and identify firms who are cheating on output quotas.

Possible break-downs of cartels

Most of the arrangements, the organization suffers from thedifficulties and tensions, and some gangs product collapsecompletely. And several factors can create problems in any agreement of collusion between supplier

v Enforcement problems: Cartel designed to limit the total production to maximize the total profits of the members. But every member of the gang findsprofitable to increase its own production. It may be difficult for OPECproduction quotas. There may be disagreements over how to share the profits. Other companies - not OPEC members - may choose to take a ride free of charge from the vicinity of the production, but only in the price of OPEC.

v Decline in demand in the market during a slowdown or recessioncreates excess capacity in the industry and put pressure onindividual companies to reduce prices to maintain revenues. There are good examples of the latter in international commodity markets, including the collapse of coffee export cartel and some of the problems faced by OPEC in recent years

v The successful entry of non-cartel firms into the industry undermines a cartel’s control of the market – e.g. the emergence of online retailers in the book industry in the mid 1990s

v he exposure of illegal price fixing by market regulators – e.g. the severe fines imposed on vitamin producers by the European Commission in the autumn of 2001 and recent investigations of price-fixing by the UK Office of Fair Trading.