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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

what is the meaning of function in economics
Effah Reply
Pls, I need more explanation on price Elasticity of Supply
Isaac Reply
Is the degree to the degree of responsiveness of a change in quantity supplied of goods to a change in price
Afran
Discuss the short-term and long-term balance positions of the firm in the monopoly market?
Rabindranath Reply
hey
Soumya
hi
Mitiku
how are you?
Mitiku
can you tell how can i economics honurs(BSC) in reputed college?
Soumya
through hard study and performing well than expected from you
Mitiku
what should i prepare for it?
Soumya
prepare first, in psychologically as well as potentially to sacrifice what's expected from you, when I say this I mean that you have to be ready, for every thing and to accept failure as a good and you need to change them to potential for achievement of ur goals
Mitiku
parna kya hai behencho?
Soumya
Hallo
Rabindranath
Hello, dear what's up?
Mitiku
cool
Momoh
good morning
Isaac
pls, is anyone here from Ghana?
Isaac
Hw s every one please
Afran
Ys please I'm in Ghana
Afran
what is firms
Anteyi Reply
A firm is a business entity which engages in the production of goods and aimed at making profit.
Avuwada
What is autarky in Economics.
Avuwada
what is choice
Tia Reply
So how is the perfect competition different from others
Rev Reply
what is choice
Tia
please what type of commodity is 1.Beaf 2.Suagr 3.Bread
Alfred Reply
1
Naziru
what is the difference between short run and long run?
Ukpen Reply
It just depends on how far you would like to run!!!🤣🤣🤣
Anna
meaning? You guys need not to be playing here; if you don't know a question, leave it for he that knows.
Ukpen
pls is question from which subject or which course
Ada
Is this not economics?
Ukpen
This place is meant to be for serious educational matters n not playing ground so pls let's make it a serious place.
Docky
Is there an economics expert here?
Docky
Okay and I was being serous
Anna
The short run is a period of time in which the quantity of at least one inputs is fixed...
Anna
that is the answer that I found online and in my text book
Anna
Elacisity
salihu
Meaning of economics
Suraj Reply
It will creates rooms for an effective demands.
Chinedum Reply
different between production and supply
babsnof
Hii
Suraj
hlo
eshita
What is the economic?
Suraj
Economics is a science which study human behavior as a relationship between ends and scarce means which has an alternative use.
Mr
what is supply
babsnof
what is different between demand and supply
Debless Reply
Demand refers to the quantity of products that consumers are willing to purchase at various prices per time while Supply has to do with the quantity of products suppliers are willing to supply at various prices per time. find the difference in between
Saye
Please what are the effects of rationing Effect of black market Effects of hoarding
Atty Reply
monoply is amarket structure charecrized by asingle seller and produce a unique product in the market
Cali Reply
yes
Niraj
I want to know wen does the demand curve shift to the right
Nana
demand curve shifts to the right when there's an increase in price of a substitute or increase in income
kin
ask me anything in economics, I promise to try and do justice to the question, you can send me an email or message, I will answer
kin
what are the factor that change the curve right
Nana
explain the law of supply in simple .....
freshwater
the Law of supply: states that all factor being equal, when the price of a particular goods increase the supply will also increase, as it decreases the supply will also decrease
kin
@Nana the factor that changes or shift the d demand curve to the right is 1) the increase in price of a substitute good or commodity 2) increase in income
kin
you can send your questions I am Comr. Kin chukwuebuka
kin
different between bill of exchange n treasure bill
Nana
yes
Ada
so would you tell me what means an apportunity cost plz?
Cali
what is true cost
Akiti
your question isn't correct naadi
Anthonia
define an apportunity cost?
Cali
orukpe ,is my question whats wrong or u dont know anything?
Cali
In a simple term, it is an Alternative foregone.
Sule
opportunity cost is the next best value of a scale of preference
Akiti
Both of you are not correct.
Nelly
opportunity cost: is a forgone alternative
kin
Monopoly is where is one producer produces a given product with no close substitute
James
what is income effect?
Qwecou Reply
if you borrow $5000 to buy a car at 12 percent compounded monthly to be repaid over the next 4 year what is monthly payment
Nitish 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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