How to Write a Summary of an Article? A company with market power would be able to affect price to its benefit. Essentially, companies must control all of the aspects of market power in order to be able to raise prices without losing customers. If a market is easy to enter lack of entry barriersthen a price increase will allow another firm to erode profits by introducing a lower-cost product.
Oligopoly Definition of oligopoly An oligopoly is an industry dominated by a few large firms. Examples of oligopolies Car industry — economies of scale have cause mergers so big multinationals dominate the market.
The main features of oligopoly: An industry which is dominated by a few firms. Concentration ratios Interdependence of firms — companies will be affected by how other firms set price and output.
In an oligopoly, there must be some barriers to entry to enable firms to gain a significant market share. These barriers to entry may include brand loyalty or economies of scale.
In an oligopoly, firms often compete on non-price competition. Oligopoly is the most common market structure How firms compete in oligopoly There are different possible ways that firms in oligopoly will compete and behave this will depend upon: The objectives of the firms; e.
The degree of contestability; i. There are different possible outcomes for oligopoly: Price wars competitive oligopoly Collusion- leading to higher prices. The kinked demand curve model This model suggests that prices will be fairly stable and there is little incentive for firms to change prices.
Therefore, firms compete using non-price competition methods. This assumes that firms seek to maximise profits. If they increase the price, then they will lose a large share of the market because they become uncompetitive compared to other firms.
Therefore demand is elastic for price increases. If firms cut price then they would gain a big increase in market share. However, it is unlikely that firms will allow this.
Therefore other firms follow suit and cut price as well. Therefore demand will only increase by a small amount.
Therefore demand is inelastic for a price cut. Therefore this suggests that prices will be rigid in oligopoly The diagram above suggests that a change in marginal cost still leads to the same price, because of the kinked demand curve.
Evaluation of kinked demand curve In the real world, prices do change. Some firms may have very strong brand loyalty and be able to increase the price without demand being very price elastic.
Price wars Firms in oligopoly may still be very competitive on price, especially if they are seeking to increase market share.
In some circumstances, we can see oligopolies where firms are seeking to cut prices and increase competitiveness.
A feature of many oligopolies is selective price wars. Collusion Another possibility for firms in oligopoly is for them to collude on price and set profit maximising levels of output. This maximises profit for the industry. In the above example, the industry was initially competitive Qc and Pc.
However, if firms collude, they can agree to restrict industry supply to Q2, and increase the price to P2.
This enables the industry to become more profitable. At Qc, firms made normal profit.Market power allows firms to increase economic profit through strategic tactics such as erecting barriers to entry, reducing rivalry, limiting substitutes, and reducing the power of buyers and suppliers (Brickley, Smith, & Zimmerman, ).
In law, a monopoly is a business entity that has significant market power, that is, the power, to charge high prices. Although monopolies may be big businesses, size is not a characteristic of a monopoly. UK super markets are perfect example of oligopoly structure of market.
The essay will also discuss the factors influencing entry of new entrants in market and also the extent to which firms under oligopoly can support price fixing. These stores can negotiate effectively on prices on basis of their high purchasing power hence they can offer.
The three most important characteristics of oligopoly are: 1. An industry dominated by a small number of large firms. We will write a custom essay sample on Oligopoly in India specifically for you for only $ $/page. Order now Size is itself a source of power.
ENTRY BARRIERS. Definition of oligopoly. Main features. Diagrams and different models of how firms can compete - kinked demand curve, price wars, collusion. Use of game theory and interdependence.
The Power of the Oligopoly - The Power of the Oligopoly Before we can start discussing the US Cottons Industry transformation into an oligopoly industry we need to define some key terms. Oligopoly is defined by Nilsson in Capitalism: Power, Profits, and Human Flourishing as “a few sellers dominate the market.