Oligopoly
From Freepedia
An oligopoly is market form in which a market is dominated by a small number of sellers (oligopolists). The word is derived from the Greek for few sellers. Because there are few participants in this type of market, each oligopolist is aware of the actions of the others. Oligopolistic markets are characterised by interactivity. The decisions of one firm influence, and are influenced by, the decisions of other firms. Strategic planning by oligopolists always involves taking into account the likely responses of the other market participants. An oligopy is a form of economy. As a quantative description of oligopoly, the four-firm concentration ratio is often utilized. This measure expresses the market share of the four largest firms in an industry as a percentage. Using this measure, an oligopoly is defined as a market in which the four-firm concentration ratio is above 40%. An example would be the supermarket industry in the United Kingdom, with a four-firm concentration ratio of over 70%.
In an oligopoly firms operate under imperfect competition, the demand curve is kinked to reflect inelasticity below market price and elasticity above market price, the product or service firms offer are differentiated and barriers to entry are strong. Following from the fierce price competitiveness created by this sticky-upward demand curve, firms utilize non-price competition in order to accrue greater revenue and market share.
Oligopsony is a market form in which the number of buyers are small while the number of sellers in theory could be large. This typically happens in market for inputs where a small number of firms are competing to obtain factors of production. This also involves strategic interactions but of a different nature than when competing in the output market to sell a final output. Oligopoly refers to the market for output while oligopsony refers to the market where these firms are the buyers and not sellers (eg. a factor market). A market with a few sellers (oligopoly) and a few buyers (oligopsony) is referred to as a bilateral oligopoly.
The terms monopoly (one seller), monopsony (one buyer), and bilateral monopoly have a similar relationship.
In industrialized countries oligopolies are found in many sectors of the economy, such as cars, consumer goods, and steel production. Unprecedented levels of competition, fueled by increasing globalisation has resulted in the emergence of oligopsony in many market sectors. For example, the aerospace industry. There are now only a small number of manufacturers of civil passenger aircraft. A further instance arises in a heavily regulated market such as wireless communications. Typically the state will license only two or three providers of cellular phone services.
Oligopolistic competition can give rise to a wide range of different outcomes. In some situations, the firms may collude to raise prices and restrict production in the same way as a monopoly. Where there is a formal agreement for such collusion, this is known as a cartel. Firms often collude in an attempt to stabilise unstable markets, so as to reduce the risks inherent in these markets for investment and product development. There are legal restrictions on such collusion in most countries. There does not have to be a formal agreement for collusion to take place (although for the act to be illegal there must be a real communication between companies) - for example, in some industries, there may be an acknowledged market leader which informally sets prices to which other producers respond, known as price leadership.
In other situations, competition between sellers in an oligopoly can be fierce, with relatively low prices and high production. This could lead to an efficient outcome approaching perfect competition.
Desoligopolization is the disappearance of an oligopoly.
Oligopoly theory makes heavy use of game theory to model the behaviour of oligopolies:
- Stackelberg's duopoly. In this model the firms move sequentially (see Stackelberg competition).
- Cournot's duopoly. In this model the firms simultaneously choose quantities (see Cournot competition).
- Bertrand's oligopoly. In this model the firms simultaneously choose prices (see Bertrand competition).
- Monopolistic competition. In this model firms pay fixed costs to enter the market.
- Contestable markets by Baumol
See also
References and External Links
- Fudenberg, Drew, and Jean Tirole. 1991. Game Theory. Cambridge: MIT Press.
- Tirole, Jean. 1988. The Theory of Industrial Organization. Cambridge: MIT Press.
- Elmer G. Wiens: Microeconomics - Online Interactive Models of Oligopoly, Differentiated Oligopoly, and Monopolistic Competition.
