<< Chapter < Page Chapter >> Page >

By the end of this section, you will be able to:

  • Explain why and how oligopolies exist
  • Contrast collusion and competition
  • Interpret and analyze the prisoner’s dilemma diagram
  • Evaluate the tradeoffs of imperfect competition

Many purchases that individuals make at the retail level are produced in markets that are neither perfectly competitive, monopolies, nor monopolistically competitive. Rather, they are oligopolies. Oligopoly arises when a small number of large firms have all or most of the sales in an industry. Examples of oligopoly abound and include the auto industry, cable television, and commercial air travel. Oligopolistic firms are like cats in a bag. They can either scratch each other to pieces or cuddle up and get comfortable with one another. If oligopolists compete hard, they may end up acting very much like perfect competitors, driving down costs and leading to zero profits for all. If oligopolists collude with each other, they may effectively act like a monopoly and succeed in pushing up prices and earning consistently high levels of profit. Oligopolies are typically characterized by mutual interdependence where various decisions such as output, price, advertising, and so on, depend on the decisions of the other firm(s). Analyzing the choices of oligopolistic firms about pricing and quantity produced involves considering the pros and cons of competition versus collusion at a given point in time.

Why do oligopolies exist?

A combination of the barriers to entry that create monopolies and the product differentiation that characterizes monopolistic competition can create the setting for an oligopoly. For example, when a government grants a patent for an invention to one firm, it may create a monopoly. When the government grants patents to, for example, three different pharmaceutical companies that each has its own drug for reducing high blood pressure, those three firms may become an oligopoly.

Similarly, a natural monopoly    will arise when the quantity demanded in a market is only large enough for a single firm to operate at the minimum of the long-run average cost curve. In such a setting, the market has room for only one firm, because no smaller firm can operate at a low enough average cost to compete, and no larger firm could sell what it produced given the quantity demanded in the market.

Quantity demanded in the market may also be two or three times the quantity needed to produce at the minimum of the average cost curve—which means that the market would have room for only two or three oligopoly firms (and they need not produce differentiated products). Again, smaller firms would have higher average costs and be unable to compete, while additional large firms would produce such a high quantity that they would not be able to sell it at a profitable price. This combination of economies of scale and market demand creates the barrier to entry, which led to the Boeing-Airbus oligopoly for large passenger aircraft.

The product differentiation at the heart of monopolistic competition can also play a role in creating oligopoly. For example, firms may need to reach a certain minimum size before they are able to spend enough on advertising and marketing to create a recognizable brand name. The problem in competing with, say, Coca-Cola or Pepsi is not that producing fizzy drinks is technologically difficult, but rather that creating a brand name and marketing effort to equal Coke or Pepsi is an enormous task.

Questions & Answers

Helloo, im new, can i get to know more?
Saniya Reply
You ask questions on any topics you find difficult.
is price elasticity of demand the same as elasticity of demand
Favour Reply
not really
i hope everyone be ok
please explain
explanations please
price elasticity of demand is the reaction of customers /demand to price changes(increase or decrease) elasticity of demand is the reaction of prices brought about by the change in demand
thank you
state the laws of demand and supply
dd: when price rises demand decreases whereas when price reduces dd rises ss: when ss rises the price rises and when ss decreases price also reduces. There is a positive relationship
Draw a demand curve graph
though price elasticity and elasticity are used interchangeably, the demand can respond to income changes and prices of related goods as well.
what is economic
Seray Reply
It is a social science which studies human behavior as a relationship between ends and scarce which have alternative uses
what is norminal wage
Demba Reply
is the wages measured in money as distinct from actual purchasing power
what is demand curve
Azeez Reply
this is a curve that slop downward from left to rich
different between capital and wealth
Samuel Reply
What is scale of reference?
Finda Reply
What is monopoly?
It is the control of market by single seller or producer
the exclusive possession or control of the supply or trade in a commodity or services
what is scarcity
Bonny Reply
scarcity means that the resources which we can produce goods and services relatives to wants for them.
what is demand
Sophia Reply
demand means that's good demand according to your needs is called demand
needs of people ar called demand
what's the difference between opportunity cost and production possibility curve?
apportunity cost means a goods which can be replace by other goods without any ease of saticfaction
different between capital and wealth
apportunity cost means the profit lose when one alternative is selected over other
what is economocs
Bonny Reply
Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses.
It deals with making choices in the face of scarcity
what is perfect complements?
Bilal Reply
explain the return to scale with the help of mathematical expression
what is scarcity
difference between fixed policy and monetary policies
Doris Reply
explain why the ppc curve slopes downward?
Osei Reply
As you shift you attention to producing more of one good the graph will represent the trade-off of of the limitations of time or resources producing one verses the other good. The first 2 end points represent that you are using all your resources to only produce one good.
what is perfect complements?
determination of perfect competition
Mumbere Reply
How can economics be important to us
Obed Reply
how can economics be important to us
economics is important on expenditure analysis
because it is to make choice
Economics also provide the individuals the opportunity to make significant contributions to make social and economic development in their country
Economic is important because of the fact of scarcity and desire for efficiency...
it enable us to make rational choice
what is unemployment
unemployment occurs when a person is actively searching for employment is unable to find work .....
unemployment occurs when an individual is willing and capable to work but is unable to attain a job.
It is important because economics provide solutions about scarcity.
which of the following measures will the government take during inflation?

Get the best Principles of economics course in your pocket!

Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
Google Play and the Google Play logo are trademarks of Google Inc.

Notification Switch

Would you like to follow the 'Principles of economics' conversation and receive update notifications?