In a oligopolic market structure, there are a few interdependent firms that change their prices according to their competitors. Ex: If Coca Cola changes their price, Pepsi is also likely to. Characteristics:
Few interdependent firms
A few barriers to entry
Products are similar, but firms try to differentiate them
There is branding and advertising
Imperfect knowledge (where customers don’t know the best price or availability)
To compete or collaborate?
Since firms are interdependent, they have the choice of competing against other firms or collaborating with them. By competing they may increase their own market share at the expense of their competitors, but by collaborating, they decrease uncertainty and the firms together act as a monopoly.
When two or more oligopolies agree to fix prices or take part in anti-competitive behavior, they form a collusive oligopoly. They agreement can be formal or informal. A formal agreement is a cartel and is generally illegal. OPEC is a legal cartel but it’s signed between countries and not firms. In an informal agreement, the firms behave as a monopoly and choose the output that maximizes output. The diagram would be like the monopoly profit maximizer. Collaborations are unlikely to last as firms have an incentive to cheat. They all would like the other members to restrict the output to what had been decided but would want to increase their own output. However, if they are a few large firms with similar costs and rising demand, the agreement is likely to last. Competing
Even if there is no agreement, oligopolic firms don’t end up changing their output with changes in cost. This can be seen in the diagram below, there is a ‘stickiness’ in price as firms produce the same output when marginal cost is at MC Upper or MC Lower. The assumption is that when a rival firms increases its price, other firms will not follow but if a rival firms decreases its price then others will follow. This leads to a...
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