Oligopoly Market Structure

Topics: Oligopoly, Competition, Monopoly Pages: 5 (1372 words) Published: April 29, 2013
Market structure refers to:
Nature and degree of competition within a particular market •The number of firms producing identical products which are homogenous Oligopoly:
This is a market structure in which the market is dominated by a small number of firms that together control the majority of the market share. Few firms dominate Although only a few firms dominate, it is possible that many small firms may also operate in the market e.g. the major airlines. It is a situation between perfect competition and monopoly. When there are only two firms in the market the situation is known as duopoly Example (hypothetical): a market has the below players;

A-56, B-43, C-22, D-12, E-3 & F-1
The three firms dominate this market with a concentration ratio of 88.3% i.e. 121/137 X100% Oligopoly may exist due to the following reasons:
1.One important factor of production may be owned by a few firms only 2.Existing firms in an industry may find it advantageous to merge or consolidate themselves in order to eliminate competition 3.A few firms in some cases obtain a dominant advantage of product differentiation

Features of oligopoly
Firms are price takers – price are determined by the interaction of demand and supply and based on this the producers decide which goods to produce •Few but large firms exist
There are close substitutes
Non- price competition exist like the form of product differentiation •Super normal profits are earned both in the short run and long run Few sellers- hence decisions are mutually interdependent and can’t ignore each other because the actions of one will affect the others. Characteristics of an oligopoly

An oligopoly usually exhibits the following features:
Product branding: Each firm in the market is selling a branded product. •Entry barriers: Entry barriers maintain supernormal profits for the dominant firms. It is possible for many smaller firms to operate on the periphery of an oligopolistic market, but none of them is large enough to have any significant effect on prices and output •Inter-dependent decision-making: Inter-dependence means that firms must take into account the likely reactions of their rivals to any change in price, output or forms of non-price competition. •Non-price competition: Non-price competition is a consistent feature of the competitive strategies of oligopolistic firms.

Classification of oligopoly
a)Pure oligopoly- also referred to as perfect
Oligopoly is perfect or pure if the product produced by the competing firms is homogenous; the differentiation of products is weak Imperfect (differentiated)- competing firms produce products which are close but not perfect substitutes b)Collusive or non collusive oligopoly

Collusive oligopoly – is a market situation where firms instead of competing, they combine to fix prices and output of the industry. Here there are two types; •Formal collusive – firms come together to protect their interests e.g. cartels like OPEC. Members enter into formal agreements by which the market is shared among them •Informal collusive – Here there are no formal agreements because it’s illegal or the firms find it beneficial not to engage in price competition. This arrangement results in price leadership, where one firm sets the price and the others follow with or without understanding. A non collusive refers to a situation where there is no understanding or agreement among the firms. It operates in the absence of collusion and a situation of great uncertainty. c)Open and closed oligopoly

Open – new firms are free to enter the industry
Closed- New firms not allowed free entry into the industry
d)Partial and full oligopoly
Partial refers to that market situation where the industry is dominated by one large firm which is seen as the price leader Full oligopoly is that situation where price leadership is not clear or absent e)Syndicated and organized oligopoly

Syndicated – a situation in the market where firms sell...

References: 1. Singh D. K. (2003): Elements of Economics, Shiva Offset Press India
2. Slavin S. L. (1996): Economics, McGraw Hill Ltd, 4th Edition
3. Saleemi N. A. (2010): Economics simplified, ACME Press Kenya Ltd, 4th Edition
4. http:// www.tutor2u.net/blog/index.php/economics/c187
5. http:// www.yourdictionary.com/oligopoly
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