The phrase oligopoly is derived from the Greek language and means “few sellers”. Sloman & Sutcliffe (2001) defines an oligopoly as a type of imperfect market in which a ‘few firms between them share a large proportion of the industry.’ (p.236). Thus, industries like oligopolies are dominated by a small number of manufacturers that may produce either differentiated or nearly identical products. It is necessary to distinguish between two types of oligopoly structures. Therefore Harrison, Smith & Davies (1992) suggests the distinction between perfect oligopoly and imperfect oligopoly. Perfect oligopolies feature market players that produce nearly identical products such as sugar or CD’s whereas imperfect oligopolies distinguish themselves by differentiated products like cars or airplanes. [...]
Table of Contents
- What is an oligopolistic market?
- How do the economic models of oligopolistic markets help our understanding of strategic interdependence?
- Collusion vs. Competition
- Cartels
- Tacit Collusion
- Kinked Demand Curve and Game Theory
Objectives and Key Themes
This paper aims to define oligopolistic markets and explore how economic models illuminate strategic interdependence among firms within these markets. It investigates the key choices facing firms in oligopolies: collusion or competition.
- Definition and characteristics of oligopolistic markets
- Entry barriers in oligopolies
- Strategic interdependence and its implications
- Models of collusion: cartels and tacit collusion
- Models of competition: kinked demand curve
Chapter Summaries
What is an oligopolistic market?: This section defines an oligopoly as a market structure dominated by a small number of firms, offering either homogenous or differentiated products. Key differentiating factors from other market structures are highlighted: significant entry barriers (economies of scale, control over resources, etc.) and strong interdependence between firms due to the limited number of competitors. The text introduces the concepts of perfect and imperfect oligopolies, distinguishing between firms producing nearly identical products versus differentiated ones. The prevalence of oligopolistic structures in modern industries is emphasized.
How do the economic models of oligopolistic markets help our understanding of strategic interdependence?: This section delves into the strategic choices facing firms in oligopolistic markets: collusion versus competition. The concept of collusion, both formal (cartels) and informal (tacit collusion), is explained. The example of OPEC is used to illustrate how a cartel can achieve profit maximization by restricting supply and raising prices. However, the inherent instability of cartels due to the temptation of individual firms to cheat is also discussed. The section lays the groundwork for further exploration of competitive models in later sections.
Collusion vs. Competition: This section explores the two main strategic choices for firms in an oligopoly: collusion and competition. It details formal collusion in cartels and its potential for profit maximization, while also addressing the risks of cheating and the legal restrictions on cartels. Informal collusion (tacit collusion), often seen with a dominant price leader, is described. The section sets the stage for the examination of competitive models, highlighting the significance of interdependence in shaping firm behavior.
Kinked Demand Curve and Game Theory: This section introduces the kinked demand curve model, illustrating how price rigidity is a common characteristic of oligopolies due to the interdependent nature of pricing decisions. If one firm raises prices, competitors are unlikely to follow, leading to lost market share for the price-raising firm. Conversely, if a firm lowers prices, competitors are likely to match the reduction, resulting in reduced profits for all firms. The section mentions game theory as another model explaining mutual dependencies among firms, promising further discussion in a subsequent part of the text (not included in the provided excerpt).
Keywords
Oligopoly, strategic interdependence, collusion, cartel, tacit collusion, kinked demand curve, game theory, entry barriers, economies of scale, price rigidity, competition.
Frequently Asked Questions: A Comprehensive Guide to Oligopolistic Markets
What is the main topic of this text?
This text provides a comprehensive overview of oligopolistic markets. It explores the characteristics of these markets, the strategic decision-making processes of firms within them, and the various economic models used to understand firm behavior in such competitive landscapes.
What are the key themes explored in the text?
The key themes revolve around strategic interdependence among firms in oligopolistic markets. The text examines the choices firms face between collusion (both explicit through cartels and tacit through unspoken agreements) and competition. It also analyzes models like the kinked demand curve to explain pricing behavior and the role of entry barriers in maintaining oligopolistic structures.
What is an oligopolistic market, and how is it different from other market structures?
An oligopolistic market is dominated by a small number of firms, offering either homogenous or differentiated products. Key differences from other structures include significant entry barriers (economies of scale, resource control, etc.) and strong interdependence between firms due to the limited number of competitors. The text distinguishes between perfect and imperfect oligopolies based on product homogeneity.
What is the significance of strategic interdependence in oligopolistic markets?
Strategic interdependence is central to understanding firm behavior in oligopolies. Firms' decisions are heavily influenced by their anticipation of competitors' actions. This interdependence leads firms to consider collusion (formal or informal) or competition as primary strategic choices, profoundly impacting market outcomes like pricing and output.
What are the different forms of collusion discussed in the text?
The text distinguishes between formal collusion (cartels), where firms explicitly agree on prices or output levels, and tacit collusion, where firms implicitly coordinate their actions without formal agreements. The text uses OPEC as an example of a cartel and discusses the inherent instability of cartels due to the temptation for individual firms to cheat.
What is the kinked demand curve model, and what does it explain?
The kinked demand curve model illustrates price rigidity as a common characteristic of oligopolies. It posits that if a firm raises prices, competitors won't follow, leading to lost market share. Conversely, if a firm lowers prices, competitors will likely match the reduction, resulting in reduced profits for all firms. This explains why prices tend to be stable in oligopolistic markets.
What role does game theory play in understanding oligopolistic markets?
The text mentions game theory as a valuable tool for analyzing the strategic interactions and interdependent decision-making of firms in oligopolistic markets. It suggests that game theory provides a framework for understanding the complexities of choosing between collusion and competition.
What are the key factors that create entry barriers in oligopolies?
The text highlights economies of scale and control over essential resources as significant entry barriers in oligopolies. These barriers make it difficult for new firms to enter the market and compete with established players, thus reinforcing the oligopolistic structure.
What are the main differences between competition and collusion in oligopolistic markets?
Competition involves firms independently making decisions about pricing and output, often leading to lower prices and potentially higher output. Collusion, either explicit (cartels) or implicit (tacit collusion), involves firms cooperating to restrict output and raise prices, leading to higher profits for participating firms but potentially harming consumers.
What are the key words associated with this topic?
Key words include: Oligopoly, strategic interdependence, collusion, cartel, tacit collusion, kinked demand curve, game theory, entry barriers, economies of scale, price rigidity, competition.
- Quote paper
- Andreas Wellmann (Author), 2004, Oligopolies. A Definition of Oligopolistic Markets, Munich, GRIN Verlag, https://www.grin.com/document/22180
