Market Structure of Oligopoly

Topics: Pricing, Cartel, Oligopoly, Monopoly, Economics, Competition / Pages: 7 (1740 words) / Published: Mar 14th, 2006
Analyse The Structure Of The Market Structure Of Oligopoly And The Difficulty In Predicting Output And Profits

Market structure of oligopoly

Oligopoly is a market structure where there are a few firms producing all or most of the market supply of a particular good or service and whose decisions about the industry's output can affect competitors. Examples of oligopolistic structures are supermarket, banking industry and pharmaceutical industry.

The characteristics of the oligopoly are:

• Small number of large firms dominate the industry
• High degree of interdependence: the behaviour of firms are affected by what they believe other rivalry firms might do
• High barriers to entry that restrict new firms to enter the industry e.g. control of technology
• Price stability within the markets
• Goods are highly differentiated or standardized
• Non –price competitive e.g. free deliveries and installation, extended warranties
• Restricted information.

Oligopolies do not compete on prices. Price wars tend to lead to lower profits, leaving a little change to market shares. However, Oligopolies firms tend to charge reasonably premium prices but they compete through advertising and other promotional means. Existing companies are safe from new companies entering the market because barriers to entry to the market are high. For example, if products are heavily promoted and producers have a number of existing successful brands, it will be very costly and difficult for new firms to establish their own new brand in an oligopoly market.

Because there are few firms in an oligopoly industry, each firms output is a large share of the market. As a result, each firm's pricing and output decisions have a substantial effect on the profitability of other firms. In addition, when making decisions relating to price or output, each firm has to take into consideration the likely reaction of rival firms. Because of this interdependence, oligopoly firms engage in strategic behaviour.

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