Question

i want to a three page explanation of oligopoly

Answer 1

Ans:)-- Oligopoly:

An oligopoly is a market form wherein a market or industry is dominated by a small number of large sellers (oligopolists). Oligopolies can result from various forms of collusion which reduce competition and lead to higher prices for consumers.Oligopoly has its own market structure.Oligopoly is a market structure with a small number of firms, none of which can keep the others from having significant influence.The concentration ratio measures the market share of the largest firms. A monopoly is one firm, duopoly is two firms and oligopoly is two or more firm.

Oligopoly is a common market form where a number of firms are in competition.Oligopolistic competition can give rise to both wide-ranging and diverse outcomes.In some situations, particular companies may employ restrictive trade practices (collusion, market sharing etc.) in order to inflate prices and restrict production in much the same way that a monopoly does. Whenever there is a formal agreement for such collusion, between companies that usually compete with one another, this practice is known as a cartel.A prime example of such a cartel is OPEC, which has a profound influence on the international price of oil.

Oligopoly theory makes heavy use of game theory to model the behavior of oligopolies:

• Stackelberg's duopoly, In this model, the firms move sequentially.
• Cournot's duopoly, In this model, the firms simultaneously choose quantities.
• Bertrand's oligopoly, In this model, the firms simultaneously choose prices.

The best example of Oligopoly which can be easy understand is:

-Banking

-Petrol Retaling

-Cinema Chains

-Supermarkets,etc.

-The above graph show that the oligopoligy of market in which different oligopolistic perform in the market on the basis of Price and quality.

* The characterictic of Oligopoly are:

-Profit maximization conditions:-- An oligopoly maximizes profits.

-Ability to set price:-- Oligopolies are price setters rather than price takers.

-Entry and exit:-- Barriers to entry are high.The most important barriers are government licenses, economies of scale, patents, access to expensive and complex technology, and strategic actions by incumbent firms designed to discourage or destroy nascent firms. Additional sources of barriers to entry often result from government regulation favoring existing firms making it difficult for new firms to enter the market.

-Number of firms:-- "Few" – a "handful" of sellers.There are so few firms that the actions of one firm can influence the actions of the other firms.

-Long run profits:--Oligopolies can retain long run abnormal profits. High barriers of entry prevent sideline firms from entering market to capture excess profits.

-Product differentiation:--Product may be homogeneous (steel) or differentiated (automobiles).

-Perfect knowledge:-- Assumptions about perfect knowledge vary but the knowledge of various economic factors can be generally described as selective. Oligopolies have perfect knowledge of their own cost and demand functions but their inter-firm information may be incomplete. Buyers have only imperfect knowledge as to price,cost and product quality.

* Concentration ratios of oligopoly is such as:

Oligopolies may be identified using concentration ratios, which measure the proportion of total market share controlled by a given number of firms. When there is a high concentration ratio in an industry, economists tend to identify the industry as an oligopoly.

* Strategy of oligopoly are:

Strategy is extremely important to firms that are interdependent. Because firms cannot act independently, they must anticipate the likely response of a rival to any given change in their price, or their non-price activity. In other words, they need to plan, and work out a range of possible options based on how they think rivals might react.

-Oligopolists have to make critical strategic decisions,such as:

• Whether to compete with rivals, or collude with them.

• Whether to raise or lower price, or keep price constant.

• Whether to be the first firm to implement a new strategy, or whether to wait and see what rivals do. The advantages of ‘going first’ or ‘going second’ are respectively called 1st and 2nd-mover advantage.

• Types of collusion oligopolis:

  Overt

  Overt collusion occurs when there is no attempt to hide agreements, such as the when firms form trade associations like the Association of Petrol Retailers.

  Covert

  Covert collusion occurs when firms try to hide the results of their collusion, usually to avoid detection by regulators, such as when fixing prices.

  Tacit

  Tacit collusion arises when firms act together, called acting in concert, but where there is no formal or even informal agreement. For example, it may be accepted that a particular firm is the price leader in an industry, and other firms simply follow the lead of this firm. All firms may ‘understand’ this, but no agreement or record exists to prove it. If firms do collude, and their behaviour can be proven to result in reduced competition, they are likely to be subject to regulation. In many cases, tacit collusion is difficult or impossible to prove, though regulators are becoming increasingly sophisticated in developing new methods of detection.