Oligopolistic market

Topics: Oligopoly, Economics, Monopoly Pages: 6 (932 words) Published: February 27, 2014
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Plan Number:

10

Topic:

Date

30 December 1999

Oligopoly

Question:
Explain how a firm operating in an oligopolistic industry can attempt to increase its market share An oligopoly is a market dominated by a few producers each of whom has some degree of market power. The industry is normally characterised by barriers to entry in the long run and each firm must take into account the likely reaction of other suppliers when considering changes in prices. Each seller produces branded products - and the strength of brand loyalty is vital in sustaining profits in the long run. Examples of oligopolistic industries should be mentioned at the start or developed through the answer: •






Petrol retailing
National Food Retailers
Package Holiday Industry
Main UK commercial banks and Building Societies
Telecommunications Industry - for example suppliers of mobile phone networks

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. Measures to increase and sustain market power: A distinction should be made between price and nonprice competition in the first half of the essay. Mention should be made of the following: 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.

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Discuss the various factors the Government is likely to take into account when attempting to assess whether or not a large dominant firm is operating in the public interest (13) The public interest might be defined in terms of economic efficiency in the use of scarce resources. The answer should consider the economic welfare effects arising from monopoly and/or oligopoly power in a market. Explicit mention should be made of productive, allocative and dynamic efficiency. Case against dominant firms with significant market power

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