Essay by Pearl
Session: May 2011
Words count: 3639
Hypothesis: My hypothesis is that the international school market in Shanghai is non-collusive
CLASSIFICATION OF MARKETS - OLIGOPOLY
Oligopoly means “few sellers”(McGee, p.201). The market which is another structure of non-price competition, lies in-between “ the extremes of perfect competition and monopoly”(McGee, p.201). The different between Oligopoly and monopolistic competition is small, and many of the markets contain components of both (McGee, p.201). The diagram below demonstrates concentration of market shares or sales in different market structures of largest 4 firms (CR4) in percentage.
Diagram 1 (Blink, Dorton, p.119)
CR4 is the most commonly used form of concentration ratio. CRx where x represents the number of largest firms. Therefore, CR4 would show the percentage of market share held by the largest 4 firms in the industry.
A) ASSUMPTIONS OF MODEL
The key feature of the Oligopoly market is that the market is dominated by few large firms. Oligopoly can be defined by the characteristic of number and size of firms, barriers to entry, product differentiation, control over price, selling activity and nature of demand.
1. Number and size of firms
A few large firms dominate the market with maybe many other smaller competitors covering the rest of the market. “Standard economic theory defines an oligopolistic market as one where the four or five largest firms control a major share of the market”(McGee, p.201). From economicshelp, the market concentration ratio is “the percentage of total sales in the market taken up by a certain number of firms”. This is used to define market structure and competitiveness of the market. To calculate the concentration ratio, is to divided total sales of an individual firm by total market sales. If the largest 4 firms dominated over 40 percent of the market, usually considered. Markets are highly concentrated, meaning that the most of the sales of product are accounted for by the few largest firms. In the Shanghai international schools market, sales represent by enrollments.
2. Barriers to entry
Usually high barriers exist in the oligopoly market. Existing dominant firms are large, have achieved economies of scale(low cost), possess technical knowledge and expertise, and have established high profile in the market place. This is the key difference to the monopolistic competition market structure. New firms entering must have hugh initial capital, expertise, overcoming existing consumer royalty, and they will face large start up costs.
From tutor2u, economies of scale are the “cost advantages” exploited by “expanding the scale of production in the long run”. The effect is to “reduce long run average costs” over a range of output.
3. Product differentiation
Products may be heterogeneous or homogenous, usually the former. Some may produce almost exactly homogeneous products, and the only the difference is the companies’ names. e.g. petrol (Blink, Dorton, p.120). Some firms produce highly heterogeneous products such as ice cream. Some firms spend a lot of budgets to promote and persuade that their product is the best or better. e.g. face cleanser (Blink, Dorton, p.120).
4. Control over price
Oligopolists can often raise prices to increase revenues and profits, but control over price is limited by the reactions of the others. Prices are often fairly rigid. Price wars are not in the best interests of sellers since with low price elasticity of demand for products, lower prices lead to lower revenues. If Oligopolists raise their prices, competitors are unlikely to follow and the demand of the firm that raises the price is lost.
5. Selling activities