Oligopoly

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WHAT IS OLIGOPOLY:

A merket dominated by few very large producers

Fraction of market served by no of smaller firms

Small firms can survive because supply market niche - small part of market that isn’t served by dominant firms

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FEATURES OF OLIGOPOLY:

Interdependence:

Firms interdependent

If one firm invests heavily in advertising campaign, other firms likely to lose sales

Barriers to entry:

Oligopolists benefit from barriers to entry

High set up costs

Oligopolists discourage entry by investing heavily in brans

Without barriers to entry, high profits enjoyed by firms would attract new entrants, reducing dominance

Price rigidity:

Prices stay same for long periods of time

Price set by market leader and others follow as firms afraid of price war

If one firm cuts price, others do same or will lose sales so revenue and profits will be lower

Non-price competition:

Firms want to avoid price wars so compete using advertising, other promotions E.G. coupons

Branding - give products name, sign, symbol, etc. so consumers identify easily

Try to create brand loyalty

Product differentiation

Economies of scale:

Oligopolists benefit from economies of sale - output increases and av. costs fall which increase profits

Smaller firms survive because don’t compete directly with dominant firms

Collusion:

Dominant firms in industry set up agreements to restrict competition E.G. firms might share market geographically

Price fixing - all firms agree to charge same higher price

Restrict output - supply decreased, price increases

Collusion illegal because exploits consumers

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ADVANTAGES OF OLIGOPOLY:

Economies of scale:

Av. costs lower so some cost savings could be passed on to consumers in form of lower prices.

Price stability:

Prices fairly stable in oligopolistic markets so promotes certainty, helpful for consumers.

Some consumers might benefit from price war - prices aggressively cut, consumers benefit from lower prices.

However, risk of firms squeezed out of market.

Also, market becomes less competitive and long term prices may be pushed higher by survivors.

Choices:

Consumers have choice.

Firms launch new brand providing consumers with new products.

Choice also provided by small producers that supply to niche markets.

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DISADVANTAGES OF OLIGOPOLY:

If no competition in economy, consumers won’t benefit.

Temptation among firms to collude.

Cartel might exist - group of firms or countries formally join together and agree of pricing/output levels in market. If successful, act as monopoly.

Consumers suffer if too much money spend on advertising. Better if products cheaper and less spend on advertising.