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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 national accounting
Ezichi Reply
is GDP good to measure living standard in countries
Samu Reply
When the GDP increase this will lead to high employment, high standards of living, high level of import and export, available of trade barrier
Rnooma
How are you doing today
Tamba Reply
what is price mechanism
Deyin Reply
In economics, a price mechanism is the manner in which the profits of goods or services affects the supply and demand of goods and services.
Lamin
how can unemployment can be prevented, or the facts to reduce unemployment
Elina Reply
provision of job opportunity
Bernice
is by creating job facilities
Lamin
Hi
Jonathan
yeah how are you doing?
Lamin
Hello
Esther
Am fine
Esther
yeah
Lamin
More vocational and technical institutions
Perthra
non motivational community
Ifraah
How are you doing today my dear
Tamba
Great
Peter
by providing adequate job facilities
Akosua
well
Daniel
principle of economic
Atinga Reply
what is elasticity
Bernice Reply
economic
sonu
A measure of the responsiveness of one variable to a change in another.
Ousmatu
if the %± (change) in quantity demanded exceed the %± in price
muhammed
type of demand
Usama
What is a budget constraint?
Nsonga Reply
A budget constraint refers to all the combination of goods and services that can be purchase by a consumer.
Bernice
What is economics
Haftamu Reply
Economics is the study of how human beings make decisions in the face of scarcity.
Nsonga
Hello my fellow colleges...
Blessful Reply
Hello
Nsonga
good morning
Samuel
what is demand?
Abdish
Demand is the combination of the consumer's needs, wants and expectations
CIISE
thank you.
Abdish
good evening
Bernice
evening hope everyone is okay
Qwa
what is demand
KING Reply
what is demand
Ntwanano
Demand is an economic principle that refer to consumer purchasing goods and services and they are willing to pay price for specific goods and services increase in goods products this will lead to decrease the amount of demand am I right?
Rnooma
you try..
Blessful
Sorry
Rnooma
Demand refers to various quantity of a commodity that consumers are willing that able to buy at various price within a given period of time
Bernice
Yes.. yes correct.
Blessful
what is demand
Addea
Demand refers to the willingness and ability of consumers to purchase a given quantity of a good or service at a given point in time or over a period in time. In economics, demand is formally defined as ‘effective’ demand meaning that it is a consumer want or a need supported by an ability to pay
Adorer
Demand= wants+needs+expectations
CIISE
what is demand and supply
Lansana Reply
what is demand
Usama
demand is defined as desire for a commondity and ability to pay a price and effective demand,
SELVAM
what is a perfect market
Ephriem
the perfect market means #large number of buyers and sellers, #homogeneous products, #free entry and exit conditions, #perfect knowledge on the part of buyers and sellers#absence of transport cost, #absence of government intervention, above stated the features are perfect market or competition
SELVAM
what is liquidity
VICTOR Reply
the ability to easily turn asset or investment to cash
Johnson
liquidity is refers to the ease with which an asset or security, can be converted into ready cash without affecting it's market price. example is milk and checking a account in the bank.
Gyamfua
the meaning PPP is public _private partnership and PPP in economic is purchasing power_parity.
Gyamfua
what is economy production
Miracle Reply
what is Monopoly
Miracle
what is monopoly
Aina Reply
How can I differentiate economics and economy? What is the differ between opportunity cost and scarcity? Marginal profits and profits? Trade-offs and opportunity cost?
CIISE

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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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