Oligopoly: A market or an industry dominated by a few firms
The key point in Oligopoly is that whether the number of the firms in the industry is big or small, a large proportion of the market/industry’s output is shared by just a small number of firms. The number of ‘a few’ firms that dominate the market varies depending on the sections of industry. For example 90% of petrol sold in a country is accounted for by four large chains of petrol stations. Market power can be measured in various ways - including the market share taken by each of the leading businesses in the market; and the capability of firms to make abnormal or supernormal profits in the long run. Barriers to entry allow producers to prevent the successful entry of new producers into the market. The concentration of market power within an oligopoly can be measured by the concentration ratio. The five-firm concentration ratio measures the combined market share of the leading five firms in the market. If two businesses take most of the industry's demand, the market can be described as a duopoly. Non-price competition:
• Spending on advertising and marketing to create and develop brand loyalty among consumers. If successful this increases a firm's market share and makes the demand for individual product ranges more inelastic. Consumer's become less sensitive to price changes if they tend to consume products habitually. Persuasive advertising seeks to change consumer preferences and may have the impact of distorting consumer preferences by changing the perceived utility or satisfaction from consuming a product. • Consumer loyalty cards; Online shopping and home delivery • Twenty-four opening hours and Guaranteed after-sales service Price competition
Price wars are a common characteristic of oligopolies. Firms may move away from short-term profit maximisation in an attempt to improve cash flow or raise market share by heavy discounting of products - sometimes below the average cost of supply (a "loss-leading strategy"). Those firms able to exploit economies of scale will be better able to lower prices and still make an economic profit. Economies of scale reduce the firm's long-run average costs and raise the profit margin on each unit sold. Predatory pricing occurs when a firm attempts to drive another supplier out of the market by lowering prices aggressively to impose losses on other businesses. Mergers and take-overs are mechanisms to achieve external growth of a business and raise market share. In recent years there has been a surge in merger activity in oligopolies - for example the global car industry and telecommunications. (b) Evaluate the view that producers and not consumers are the main beneficiaries of oligopolistic market structures.
-Producers cons: Relies heavy on advertising/branding, can suffer from diseconomies of scale. - Producer pros: Innovation in products due to low competition, benefits of economies of scale, super abnormal profit possibilities, the product type generally has the same price. - Consumer cons: Limited choice of products, the price does not range therefore could be overpriced without knowledge, products are most likely similar therefore not “different”, small fear of new competitive firms because of high barriers to entry. - Consumer pros: No worry of failing products, the price is likely to not change, familiarity with products. -Overall, both the consumers and producers benefit, however producers benefit more because once a “player” in the “game” of oligopolistic markets, the firm can simply comply to the prices already set and gain profit because the price set is obviously higher than that of the original production prices. Henceforth, the producers gain abnormal profit.
7. (a) Explain the necessary conditions for price discrimination to take place. Price Discrimination: Price discrimination is the practice...