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30 December 1999
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:
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:
Spending on advertising and marketing to create and develop brand loyalty among consumers. If successful this increases a