Oligopolistic Market

Oligopolistic Market

An oligopoly exists when a few companies dominate an industry. This concentration often leads to collusion among manufacturers, so that prices are set by agreement rather than by the operation of the supply and demand mechanism.

For an oligopoly to exist, the few companies do not need to control all the production or sale of a particular commodity or service. They only need to control a significant share of the total production or sales.

As in a monopoly, an oligopoly can persist only if there are significant barriers to entry to new competitors. Obviously, the presence of relatively few firms in an industry does not negate the existence of competition. The existing few firms may still act independently even while they collude on prices.

In an oligopolistic market, competition often takes the form of increased spending on marketing and advertising to win brand loyalty rather than on reducing prices or increasing the quality of products.

Another important characteristic of an oligopoly is interdependence between firms. This means that each firm must take into account the likely reactions of other firms in the market when making pricing and investment decisions. This creates uncertainty in such markets - which economists seek to model through the use of game theory.

Economics is much like a game in which the players anticipate one another's moves.

Game theory may be applied in situations in which decision makers must take into account the reasoning of other decision makers. It has been used, for example, to determine the formation of political coalitions or business conglomerates, the optimum price at which to sell products or services, the best site for a manufacturing plant, and even the behaviour of certain species in the struggle for survival.

Key features of Oligopoly.

* A few firms selling similar product.

* Each firm produces branded products.

* Likely to be significant entry barriers into the market in the long run which allows firms to make supernormal profits.

* Interdependence between competing firms. Businesses have to take into account likely reactions of rivals to any change in price and output

Oligopolistic pricing.

There are four major theories about oligopoly pricing:

1) Oligopoly firms collaborate to charge the monopoly price and get monopoly profits.

2) Oligopoly firms compete on price so that price and profits will be the same as a competitive industry.

3) Oligopoly price and profits will be between the monopoly and competitive ends of the scale.

4) Oligopoly prices and profits are "indeterminate" because of the difficulties in modeling interdependent price and output decisions.

The importance of Price and Non-price Competition.

Firms compete for market share and the demand from consumers in lots of ways. We make an important distinction between price competition and non-price competition. Price competition can involve discounting the price of a product (or a range of products) to increase demand.

Non-price competition focuses on other strategies for increasing market share. Consider the example of the highly competitive UK supermarket industry where non-price competition has become very important in the battle for sales

* Mass media advertising and marketing

* Store Loyalty cards

* Banking and other Financial Services (including travel insurance)

* In-store chemists / post offices / creches

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