Being a Oligopolist Is Not So Easy

Managerial Economics: Term Paper

Topic: " Being an Oligopolist is not easy "

Introduction

This paper will focus on the behaviour of oligopolists and the situations they are confronted with in their daily business.

The paper is divided in three parts. The first part explains the basic keywords. The second part tries to explain the nice and the sad sides of an oligopolist, and will discuss the consequences of their behaviour.

As well, I will try to examine the statement "being an oligopolist is not easy", and whether it is true or whether the truth lies in between.

Aspects of Market Structure

The four types of market structure are listed in the drawing below:

Characteristics of an oligopoly

Definition

Oligopoly is a type of imperfect competition with a market structure, that has only a

small group of sellers which offers similar or even identical products.

Oligopolist, Oligopoly

An oligopoly is a market form in which a market is dominated by a small number of sellers (oligopolists). There are few participants in this type of market and each oligopolist is aware of the actions of the others. Oligopolistic markets are characterised by interactivity. The decisions of one firm influence and are influenced by the decisions of other firms.

The question is how we can describe the market situation of an Oligopolist. If we compare it to the other possibilities of a market situation such as a competitive market or a monopolistic market, it is neither of them.

The typical characteristics of an oligopoly is that each of the market players offer a product similar or identical to the others in a competitive market. This fact distinguishes the market structure from a monopolistic competition where the firms are similar but not identical.

On the other side, there exists more than one player in this kind of market what makes it different from the monopoly. So the situation begins in a difficult way for an oligopolist: on the one side he would like to play the game of a monopolist and on the other side, he does everything to avoid the entry of new players, which will have a negative impact about his profit. So, he is faced with the first dilemma. We will go deeper into this topic later in the paper.

An oligopoly market is a market form, which is something between these two kind of extreme market situations. Companies in these markets have competition but at the same time are not faced with too much competition so that they are price takers.

Now we understand how economists define the various types of market structures, so we can continue our analysis.

Oligopoly is best defined by the conduct (or behaviour) of firms within a market rather than by its market structure.

Oligopolistic firms are very large, with high market concentrations. Oligopoly is the dominant mode of organisation in many sectors of the economy. This concentration can be measured by looking at the market share of each company. Table 1.1 shows that the market for vehicle testing is highly concentrated within 4 firms supplying almost 97% of the whole market.

Market Share Overview Dekra:

DEKRA TЬV GTЬ KЬS FSP VЬK TFЬ GTS

Germany 00 GJ (22 Mio.) 35,65% 46,58% 9,37% 5,20% 1,69% 0,51% 0,87% 0,14%

Germany 01 GJ (23,6 Mio.) 35,76% 45,11% 10,02% 5,86% 1,69% 0,52% 0,87% 0,17%

Germany 02 GJ (23,6 Mio.) 35,68% 44,26% 10,61% 6,46% 1,68% 0,49% 0,61% 0,21%

Germany 03 GJ (24,4 Mio.) 35,46% 43,27% 11,24% 6,93% 1,81% 0,44% 0,62% 0,24%

Germany 04 GJ (24,1 Mio.) 35,19% 42,56% 11,83% 7,28% 1,87% 0,40% 0,63% 0,24%

Germany 04 1 HJ (13,1 Mio.) 35,17% 42,78% 11,70% 7,21% 1,86% 0,41% 0,63% 0,24%

Germany 05 1 HJ (12,9 Mio.) 35,02% 41,84% 12,32% 7,66% 1,89% 0,38% 0,65% 0,24%

Germany Delta 04/05 in % -0,15% -0,94% 0,62% 0,45% 0,03% -0,03% 0,02% 0,00%

Concentration ratio

In economics, the concentration ratio of an industry is used as an indicator of the relative size of firms in relation to the industry as a whole. This may also assist in determining the market form of the industry. One commonly used concentration ratio is the four-firm concentration ratio, which consists of the market share, as a percentage, of the four largest firms in the industry.

An oligopoly is a form of economy. Using the four-firm concentration ration, an oligopoly is defined as a market in which the four-firm concentration ratio is above 40% according to Wikipedia.

In more general terms, a way of measuring market share is to look at the concentration ratio (CRN): The N-firm concentration ratio is the percentage of market output generated by the N largest firms in the industry. We already covered the most used- CR4 - percentage of sales of the 4 top firms in the industry.

One measure of this ratio is the 5 firms concentration ratio which shows the market share of the 5 largest companies.

Normally an oligopoly exists when the top five firms in the market account for more than 60% of total market demand/sales. Relating to the index featured above, the market share for standard and emissionsÒ' test remained approximately at over

98,76 % for the 5 top market players ( Dekra, TЬV, GTЬ, KЬS, FSP), so the company