oligopoly

Examples of oligopoly in the following topics:

• Product Differentiation

  • Oligopolies can form when product differentiation causes decreased competition within an industry.
  • While some oligopoly industries make standardized products - tools, copper, and steep pipes, for example - others make differentiated products: cars, cigarettes, soda, and cell phone manufacturers.
  • For example, the soft drink industry in the US is an oligopoly dominated by the Coca-Cola Company, the Dr.
  • Some companies are able to use marketing to achieve product differentiation, encouraging the formation of oligopolies.
  • Explain the relationship between product differentiation and the existence of an oligopoly

• Entry Barriers

  • One important source of oligopoly power are barriers to entry: obstacles that make it difficult to enter a given market.
  • One important source of oligopoly power is barriers to entry.
  • In industrialized economies, barriers to entry have resulted in oligopolies forming in many sectors, with unprecedented levels of competition fueled by increasing globalization.
  • Oligopolies have also formed in heavily-regulated markets such as wireless communications: in some areas only two or three providers are licensed to operate .
  • Explain the necessity of entry barriers for the existence of an oligopoly

• Few Sellers

  • An oligopoly - a market dominated by a few sellers - is often able to maintain market power through increasing returns to scale.
  • The existence of oligopoly requires that a few firms are able to gain significant market power, preventing other, smaller competitors from entering the market.
  • Monopolies and oligopolies, however, often form when an industry has increasing returns to scale at relatively high output levels.
  • Therefore, the oligopoly firms have a built-in defense against new competition.
  • Explain how increasing returns to scale will cause a higher prevalence of oligopolies

• Game Theory Applications to Oligopoly

  • Game theory provides a framework for understanding how firms behave in an oligopoly.
  • In an oligopoly, firms are interdependent; they are affected not only by their own decisions regarding how much to produce, but by the decisions of other firms in the market as well.
  • For example, game theory can explain why oligopolies have trouble maintaining collusive arrangements to generate monopoly profits.
  • While game theory is important to understanding firm behavior in oligopolies, it is generally not needed to understand competitive or monopolized markets.

• Price Leadership

  • Price leadership is a form of tacit collusion that oligopolies may use to achieve a monopoly-like market outcome.
  • Oligopolies are defined by one firm's interdependence on other firms within the industry.
  • Unlike perfect competition and monopoly, uncertainty about how rival firms interact makes the specification of a single model of oligopoly impossible.
  • In this way, all three can receive the benefits of oligopoly .

• Oligopoly

  • An oligopoly is a market that is characterized by the interdependence of firms.
  • The kinked demand model begins with an oligopoly that has two sellers of a homogeneous good.
  • The typical characteristics that constitute an oligopoly are:
  • Primary metals industries are examples of oligopolies with homogeneous goods.
  • Instant breakfast drink mixes are an example of an oligopoly with differentiated products.

• Collusion and Competition

  • Firms in an oligopoly can increase their profits through collusion, but collusive arrangements are inherently unstable.
  • Oligopoly is a market structure in which there are a few firms producing a product.
  • However, collusive oligopoly is inherently unstable, because the most efficient firms will be tempted to break ranks by cutting prices in order to increase market share.

• The Prisoner's Dilemma and Oligopoly

  • Similarly to the prisoner's dilemma scenario, cooperation is difficult to maintain in an oligopoly because cooperation is not in the best interest of the individual players.
  • Coca-Cola and Pepsi compete in an oligopoly, and thus are highly competitive against one another (as they have limited other competitive threats).

• Definition of Perfect Competition

  • Oligopoly: An industry structure in which there are a few firms producing products that range from slightly differentiated to highly differentiated.

• Defining a Market System

  • Based on the level of competition in a market system, economists have identified a number of different types of structures, such as monopoly, oligopoly, and perfect competition.