Oligopoly
Phyllis Machio
, Introduction
• In pure competition there are many small competitors,
in monopoly there is only one large firm in the market
however much of the world lies in between the two
extremes.
• Oligopoly is a market where only a few compete with
one another.
• The number of competitors is small enough for each to
have a non-negligible effect on price.
• Examples include cement industry, telephony industry,
aluminum, steel and etc. Automobile is also another
though has many competitors the dominants ones are
Honda, Toyota, Chrysler, general motors, ford
, Characteristics
• Characteristics of an Oligopoly market
• Profit maximization conditions: An oligopoly maximizes profits by producing where marginal
revenue equals marginal costs
• Ability to set price: Oligopolies are price setters rather than price takers
• Entry and exit: Barriers to entry are high. The most important barriers are economies of scale,
patents, access to expensive and complex technology, and strategic actions by incumbent firms
designed to discourage or destroy nascent firms. Additional sources of barriers to entry often result
from government regulation favoring existing firms making it difficult for new firms to enter the
market
• Number of firms: "Few" – a "handful" of sellers. There are so few firms that the actions of one firm
can influence the actions of the other firms.
• Long run profits: Oligopolies can retain long run abnormal profits. High barriers of entry prevent
sideline firms from entering market to capture excess profits.
• Product differentiation: Product may be homogeneous (steel) or differentiated (automobiles).
• Interdependence: The distinctive feature of an oligopoly is interdependence. Oligopolies are
typically composed of a few large firms. Each firm is so large that its actions affect market
conditions. Therefore the competing firms will be aware of a firm's market actions and will respond
appropriately. This means that in contemplating a market action, a firm must take into
consideration the possible reactions of all competing firms and the firm's countermoves.
• Non-Price Competition: Oligopolies tend to compete on terms other than price. Loyalty schemes,
advertisement, and product differentiation are all examples of non-price competition
Phyllis Machio
, Introduction
• In pure competition there are many small competitors,
in monopoly there is only one large firm in the market
however much of the world lies in between the two
extremes.
• Oligopoly is a market where only a few compete with
one another.
• The number of competitors is small enough for each to
have a non-negligible effect on price.
• Examples include cement industry, telephony industry,
aluminum, steel and etc. Automobile is also another
though has many competitors the dominants ones are
Honda, Toyota, Chrysler, general motors, ford
, Characteristics
• Characteristics of an Oligopoly market
• Profit maximization conditions: An oligopoly maximizes profits by producing where marginal
revenue equals marginal costs
• Ability to set price: Oligopolies are price setters rather than price takers
• Entry and exit: Barriers to entry are high. The most important barriers are economies of scale,
patents, access to expensive and complex technology, and strategic actions by incumbent firms
designed to discourage or destroy nascent firms. Additional sources of barriers to entry often result
from government regulation favoring existing firms making it difficult for new firms to enter the
market
• Number of firms: "Few" – a "handful" of sellers. There are so few firms that the actions of one firm
can influence the actions of the other firms.
• Long run profits: Oligopolies can retain long run abnormal profits. High barriers of entry prevent
sideline firms from entering market to capture excess profits.
• Product differentiation: Product may be homogeneous (steel) or differentiated (automobiles).
• Interdependence: The distinctive feature of an oligopoly is interdependence. Oligopolies are
typically composed of a few large firms. Each firm is so large that its actions affect market
conditions. Therefore the competing firms will be aware of a firm's market actions and will respond
appropriately. This means that in contemplating a market action, a firm must take into
consideration the possible reactions of all competing firms and the firm's countermoves.
• Non-Price Competition: Oligopolies tend to compete on terms other than price. Loyalty schemes,
advertisement, and product differentiation are all examples of non-price competition
