An oligopoly is a form of a market, in which any particular industry is dominated by few sellers which are also known as oligopolists. Originally this word is derived from Greek, which means “few to sell”. Now since there is small number of smaller involved in a particular industry, this makes them very much conscious of the other players of the same industry. Rather, to be more precise any decision of Firm one influence and are influenced by, the decision of other firms. Lot of business scrutiny techniques are used in strategic planning such as SWOT, PEST, STEER and EPISTEL analysis needs to take into report the likely responses of the other players.
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Description
Oligopoly is a common form of market. Often the four-firm is used to describe vice nary of oligopoly, in which the most common ratios are CR4 and the CR8, which means the four and the eight largest firms in a particular industry and also measures the share of the four or the eight largest organizations in an industry as a percentage. Now let me use an example to make the above point clear. Here we will take the US cellular phone market. In 2008, the companies like AT&T, Sprint, Verizon and T-Mobile together controlled over 90% of the market.
Despite of the common market share and oligopolistic competition can give rise to a wide range of results. In a circumstances where a firm may develop a practice which could be a trade preventive, such as collusion, market sharing etc. to raise there product price while restrict the production which is similar to the monopoly, this could be short term as well as long term. Let us see and understand monopoly in equilibrium.
The illustration of monopoly is considered to be the same in short run and long run.
Now the revenue maximization occurs where MR=MC. And therefore equilibrium is at P and Q.
Features of this diagram are that there are barriers to entry in Monopoly. Companies are price maker. Profits are maximized at output where MR=MC. This means they set a price greater than MC which is inefficient. In this diagram the companies makes supernormal profits because AR is greater than AC.
In order to get this in effect, a official agreement takes place which is also known as cartel. The best example of cartel is OPEC which has a deep influence on worldwide price of oil. These kinds of participant are Price Setter and not the Price Taker.
Through the process of collusion, oligologics can reduce the risks in markets for investment and product development and is an attempt to steady the unbalanced market. In most countries this is legally restricted. In other situations, competition can be fiercer between sellers in an oligopoly, with relatively low prices and high production. This could lead to proficient results. The results can be better when there are more companies in an industry.
Characteristics
The major characteristics of oligopoly are to maximize the profit by producing, where in the generated marginal revenue equals to the marginal costs. Position to set the price, which we have previously discussed above that oligopolies are price setters rather than price takers. Barriers for new firms to enter are higher. We can split these barriers in two groups, one of which is natural and the other is strategic entry barriers. These barriers are based on economical scale, patents, way in to expensive and difficult technology and above all the tactical actions by present firms designed to put off or tear down emerging firms. Since, there are few companies which results the actions of one firm can weight the actions of the other firms. Predominate factor is high barriers of the entry which prevents emerging companies from entering market, which in result can retain long run atypical profits. The most typical feature of an oligopoly is interdependence. Since oligopolies consists of few large firms and, each firm is so large that any of its action can affect the market condition. And due to this reason, the competing firms are well conscious of the market actions and are set ready to respond accordingly and correctly. In order to view a market action, a firm must take into the deliberation the possible reactions of all rival firms and there moves. A game of chess is a best example to simplify the above statements. Wherein both the opponents are very well conscious of each others action and are ready for the counter moves, this is duopoly. But this could explain the oligopoly since the players in the market are few in numbers.
Modeling
There is no model to explain the process of an oligopolistic market. In some markets there is a solitary firm which wheels a leading share of the market and a group of smaller firms. The dominant firm sets prices which are simply taken by the smaller firms in shaping their profit maximizing level of production. This type of market is known as a monopoly.
Cournot-Nash model
The Cournot-Nash model is the simplest oligopoly model. In this model there are two likewise positioned firms, the firms competes on the basis of the capacity rather than price and each firm makes and production decision assuming that the other firm’s actions is fixed. Now the bend of the demand in the market is based on assumptions to be linear and marginal cost are constant. To find the Cournot-Nash equation, one needs to determine how each firm reacts to a change in the output of the other firm which is followed by sequence of proceedings and reactions. This outline continues until a point is reached where neither firm desires to change what it is doing, given how it believes the other firm will react to any change. The balance is the intersection of the two firm’s reaction functions. The reaction purpose shows how one firm reacts to the mass choice of the other firm. For an example, assuming that the Firm A demand function P = (60 – Q2) – Q1 where Q2 is the quantity produced by the other firm and Q1 is the sum produced by firm A. Assume that the marginal cost is 12 Firm A wants to know its maximizing quantity and price. Firm A begins the process by following maximization rule of equating marginal revenue to marginal costs. Firm A’s total revenue purpose is PQ = Q1(60 – Q2 – Q1) = 60Q1- Q1Q2 – Q12. The marginal purpose is MR = 60 – Q2 – 2Q.
MR = MC
60 – Q2 – 2Q = 12
2Q = 48 – Q2
Q1 = 24 – 0.5Q2 (1.1)
Q2 = 24 – 0.5Q1 (1.2)
Equation 1.1 is the reaction function for firm A. Equation 1.2 is the reaction function for firm B. The balance quantities can also be determined graphically, in which the balance explanation would be at the intersection of the two reaction functions.
In mechanized economics, barriers to entry have resulted in oligopolies forming in many sectors, with new levels of struggle fueled by rising globalization. These are typically determined by development of a product and advertising. For example, there is only undersized figure of producers of civil passenger aircraft. Oligopolies have also arisen in a lot regulated markets such as wireless communications, in several areas only two or three providers are licensed to operate.
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In United Kingdom, there are five banks that control the UK banking sector, and were also accused of being an oligopoly by the newcomer Virgin bank. Going to the grocery market, we find four companies who shares 74.4% to 75.01% of the grocery market which are Tesco, Sainsbury’s, Asda and Morrisons. The detergent market is dominated by only two players and they are Unilever and Procter & Gamble.
Demand Curve
In oligopoly, any company operates under flawed competition. With the vicious price competitiveness created by demand bend, firms use non-price competition in order to boost revenue and market share. “Kinked” insist curves are similar to usual insist curves. They are different by a hypothesized bowed bend with a discontinuity at the bend-“Kink”. Hence, the first imitative at that point is not clear and leads to a hop discontinuity in the marginal revenue curve.
The inspiration following this kink is the thought that if firms will not elevate their prices because even a small price raise will drop many customer in oligopolistic or monopolistically competitive market. The reason behind this is that, the competitors will generally pay no attention to the increase in prices and will focus on gaining a larger market share. However, even a large price reduction will gain only a few customers because such an action will begin a price war with other players in the market. And for this reason, the curve is therefore more price-elastic for price add to and less so for price decreases. Firms will often enter the industry in the long run.
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