There are many models of market structure in the field of economics. They include perfect competition on one end, monopoly on the other end, and competitive monopoly and oligopoly somewhere in the middle. In this paper, we will focus on the oligopoly structure because it is one of the strongest influences in the United States market. Although oligopolies can also be global, we will focus strictly on the United States here. We will define oligopoly, give key characteristics important to the oligopoly structure, explain why oligopolies form, then give an example of an oligopoly in today’s economy. Finally, we will discuss the benefits and costs in this type of market structure.
Oligopoly is defined as a market structure in which there are a few major firms dominating the market for a specific product or service.
One key factor in oligopolies is that each firm/company explicitly takes other firms’ likely responses into account when setting prices, launching new products, etc. For this reason, there is significant ‘friendly’ competition between firms. They each know that it is in their own best interests to maintain a stable price, for if they lower their prices, their competitors will do the same and knock out any advantage the original firm was hoping to gain with lower prices. If they raise their prices, the competitors will not follow suit and will therefore steal away all the customers of the higher priced product. Another key factor in oligopolies is that there are significant barriers to entry into this market. These barriers can include things such as high fixed costs, availability of resources, and brand loyalty. Many smaller companies simply do not have the cash or resources to compete with these large firms. Another characteristic of oligopolies is that the percentages of market shares change very little from year to year and are dependent upon introduction of new products or acquisitions of smaller companies. For this reason, a benchmark of oligopolies is that they offer many ‘varieties’ in an attempt to gain some edge over their competitors.
Why and how to oligopolies form? Oligopolies generally form over time as larger companies acquire or buy out smaller ones. They do this in order to gain market presence, new technology, more efficient production methods, etc. Oligopolies are sustained through price competition, brand loyalty, and incessant advertising.
A perfect example of an oligopoly market structure in the United States is seen in the carbonated beverages industry. There are a few major brands, namely Coca Cola, Pepsi Co and Dr Pepper Snapple Group, who control the vast majority of the market, a combined 89.6%. Other brands cannot compete in comparison due to the nearly insurmountable barriers to entry, including large sunk costs, fierce brand loyalty, and incessant advertising costs. Given the small number of carbonated beverage giants, you can be sure that each company is watching what its competitors are doing in regard to price, introduction of new flavors, and even the acquisition of bottling plants. They cannot allow their competitors to possess an advantage for fear of losing valuable market share. Some evidence of this is the fact that prices are comparable across all three brands. A 2 liter bottle of a Coca Cola product costs $1.79, while the same 2 liter bottle of a Pepsi Co product costs $1.69, and a 2 liter bottle of a Dr Pepper product costs $1.79. Finally, in addition to price, the brands also compete on the new product front to give way to a variety of available options to vie for consumer attention. For example, in addition to the many flavors and varieties of soda, the three dominating companies also own brands of bottled water, sports drinks, energy drinks, teas, juices, and snack foods. The goals of each company are to dominate shelf life, shelf space, and mind space. Shelf space is clearly dominated through the variety of flavors and products offered. The more products a...
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