Economics

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  • Topic: Oligopoly, Collusion, Pricing
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  • Published : February 17, 2013
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Collusive and Non-Collusive Oligopoly
What is an oligopoly?
An oligopoly is a market dominated by a few
producers . An oligopoly is an industry where there is a
high level of market concentration. Examples of
markets that can be described as oligopolies include the
markets for petrol in the UK, soft drinks producers and
the major high street banks. Another example is the
global market for sports footwear – 60% of which is held
by Nike a nd Adidas.
However, oligopoly is best defined by the conduct
(or behaviour) of firms within a market .
T he concentration ratio measures the extent to which a
market or industry is dominated by a few leading firms.
Normally an oligopoly exists when the top five firms in the market account for more than 6 0% of total market sales.

Characteristics of an oligopoly
T here is no single theory of price and output under conditions of oligopoly. If a price war breaks out, oligopolists may choose produce and price much as a highly competitive industry would; whereas at other times they act like a pure monopoly. An oligopoly usually exhibits the following features:

1. Product branding: Each firm in the market is selling a branded product. 2. Entry barriers: Entry barriers maintain supernormal profits for the dominant firms. It is possible for many smaller firms to operate on the periphery of an oligopolistic market, but none of them is large enough to have any significant effect on prices and output 3. Inter-dependent decision-making: Inter-dependence means that firms must take into account the likely reactions of their rivals to any change in price, output or forms of nonprice competition. 4. Non-price competition: Non-price competition is a consistent feature of the competitive strategies of oligopolistic firms.

Duopoly
Duopoly is a form of oligopoly. In its purest form two firms control all of the market, but in reality the term duopoly is used to describe any market where two firms dominate with a significant market share. There are many examples of duopoly; including Coca -Cola and Pepsi (soft drinks), Unilever and Proctor & Gamble (detergents), Sotheby’s and Christie’s (auctioneers of antiques/paintings), Standard and Poor’s and Moody’s (credit rating agencies), BSkyB and Setanta (live Premiership football), and Airbus and Boeing (aircraft manufacturers). In these markets entry barriers are high although there are usually smaller players in the market surviving successfully such as Virgin Cola. However, if it had not been for the European Competition Com mission Sky’s monopoly in the market for live television coverage of http://www.tutor2u.net/blog/index.php/economics/

Premiership football in the UK would have continued. The high entry barriers in duopo lies are usually based on one or more of the fol lowing: brand loyalty, product differe ntiation and huge research economies of scale.

Source: Adapted from Robert Nutter, EconoMax, October 2007

Kinked Demand Curve Model of Oligopoly
Costs

Raising price above P1
Demand is relatively elastic because
other firms do not match a price rise

Assume we start out at P1 and Q1:

Firm loses market share and some total
r evenue

Revenues

Will a firm benefit from raising price
above P1?
Will it benefit from cutting price below
P1?

P1
Reducing price below P1
Demand is relatively inelastic
Little gain in market share – other firms
have followed suit in cutting prices
Total revenue may still fall

AR
Q1

MR

Output (Q)

T he kinked demand curve model assumes that a business might face a dual demand curve f or its product based on the likely reactions of other firms to a change in its price or another variable. The common assumption is that firms in an oligopoly are looking to p rotect and maintain their market share and that rival firms are unlikely to match another’s p rice increase but may match a price fall. I.e. rival firms within an oligopoly react asymmetrically to a change in the price...
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