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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

Pass questions and answers
Appiah Reply
the relationship between two concept supply and Demand
Lebogang Reply
what is globalization
Nuertey Reply
what is the best definition of economic?
Humble Reply
what is aggregat demand in open economy
Dagim Reply
Aggregate demand is expressed as the total amount of money exchanged for those goods and services at a specific price level and point in time.
Bayou
What is the full meaning of GDP
Akinbulejo Reply
gross domestic product
Yanish
Gross Domestic Product
bode
Formula for calculating the percentage of change in price, quantity, price elasticity of demand
Augustina Reply
Given that the elasticity of supply for a good is 2 and the percentage change in price is 45%.What is the percentage change in quantity supplied
Mbe Reply
Please don't understand
Augustina
Explain
Adebisi
ok
Owoeye
percentage change should be 44%
Owoeye
state and explainfour function of a costumer service
Egba Reply
the circular flow model of the economy is a simplification showing how the economy works and the relationship between income,production and spending in the economy as a whole
Anna Reply
It is an idea that show us the way the economy works about their income, production, and spending in the economy
Augustina
what is circular flow
Ntokozo Reply
what is economics?
Dorcas Reply
Economics is defined as the science that study human behaviour as a relationship between ends and scarce means which have alternative uses.
Emmanuella
economics is a social science concerned with the production,distribution, and consumption of goods and services
Michael
Economics as a science studies human behaviour as a relationship between ends and scarce means with alternative use.
Augustina
economics can be defined as social science which studies human behavior as a relationship between ends and scare means which have alternative uses.... Lionel C Robins
Owoeye
in 2021 Amazon reduced the annual subscription fee for its prime membership service which provides free two_day shipping on many goods and other benefits, from $119 to $99. Zoppa consulting, an investment firm estimated that before the price reduction, prime had 62million subscribers globally. If so, what is the arc elasticity of demand for a prime membership.
Joan Reply
Differences between microeconomics and macroeconomics
tatiana Reply
Macroeconomics deal with the economy as a whole.that is an economy affect the firm ,government and the households eg.unemployment, whilst Microeconomics deal with the the decision making of households,firm and government separately.
Amah
Microeconomics is the branch of economic which studies the behaviour of individual households, firms and industries whiles macroeconomic studies the economy as a whole. It looks at the economy from a a broader perspective.
Augustina
what is Economics
Ebem Reply
the branch of knowledge concerned with the production, consumption, and transfer of wealth and has Influence by sociology!!!!
Ajay
Economics is the study of how humans make decisions when they want to fulfil their requirements and desires for goods, services and resources.
Abdullah
Economics is the study how humans make decisions in the faces of scarcity.
Rose
economic is the study of how human make decision in the fact of scarcity.
Toang
Economics is a social science which study human behavior as a relationship between earn and scarce mean which have alternative uses
Juliet
what is market structure
Fatima
market structure in economics depicts how firms are differentiated and categorised based on types of goods they sell and how their operations are affected by external factors and elements.
Nasir
what is economic theory
Madara

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Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
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