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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

how did Mc connel defined economics
Isaac Reply
what is a economy planning?
Jacob Reply
what is demand
Sunday Reply
demand means desire for a commodity backed by willingness & ability to pay for that commodity
what is supply
supply means suppliers supplying more commodities when price's high or less when price's low to satisfy human want
the coefficient of price elasticity of supply is the measure of percentage change in the quantity supplied of a good due to a given percentage change in its price.
Please what is Economics of Scales?
what is cardinal and ordinal utility?
Cardinal utility is the satisfaction derived by the consumers from the consumption of goods and services while ordinal is ranked in terms of preference.
Please explain what is meant by Economic Integration?
Please I need help!!!!
economics scales I don't know but I know laws of returns to scale
can someone help explain to me what is fairly inelastic dd
Economics Economics - The study of how people use their limited resources to try to satisfy unlimited wants
Economic integration has been one of the main economic developments affecting international trade in the last years. Countries have wanted to engage in economic cooperation to use their respective resources more effectively and to provide large markets for member-countries of the resulting integrate
Inelastic Demand When consumers are relatively unresponsive to price changes. A PED coefficient of less than one means that a particular change in the price of a good will be met by a proportionally smaller change in the quantity demanded.
what is development planning?
Emmanuel Reply
What is economics?
Shubham Reply
economics is study of scarcity and how humans make decisions.
reason for development planning in West Africa
what is development planning?
What is homo Economicus?
nongo Reply
when a person is part 50% rational and the other part of him is 50% focused on money as an incentive
what makes the economy to be stable
what measures are necessary to the economy which is not doing fine
must find out the problems originating from and take remedy for it.
Economics as a social science Discuss
list and explain three implication of balance of payment disequilibrium
Jayson Reply
In economics pollution, what's spillover?
Chinedum Reply
what is net national income
Ibrahim Reply
relation between business economics and traditional economics
Netra Reply
more explanation on GDP
Isaac Reply
it is a country total out put of goods and services divided by the total population of the country.I think it can also be derived from the country labour force,,because it mostly depend on the labour force and the level of technology .
labour force and technological progress leads to greater production increases the GDP
what is elasticity of demand
degree of responsiveness of demand to changes in price and other factors that influence demand.
It is the degree of responsiveness of demand and supply to a little change in price of a goods and services
What is economics?
Bubu Reply
by this time
It is a social science that analyses production,distribution and consumption of goods and services
A social science that study human behavior in relationship with decision making
a social science that studies human behavior as a relationship between ends and scarce means which has alternative uses
it is a science that study human begin as a relation to ends and scarce should which have alternative uses
the science in which we study about the investement of our wealth.
what is competitive demand
a competitive demand is also known as substitute demand .the moment the price of the commodity increase consumers will purchase the other other commodity which it's price is low and the vice versa. an example is milo and bournvita
what is different between equilibrium and demand?
equilibrium is a situation where market is stable there is no entry nor exit. demand is the willingness to pay Which is backed by law.
list and explain three implication of balance of payment disequilibrium?
Economics is a social science that study's human behaviour as a relationship between ends and scares means which have alternative uses
What are the typical patterns of GDP for a high-income economy like the United States in the long run and the short run?
mwangala Reply
What are the limitation and significant of macroeconomic
Usman Reply

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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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