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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 makes the economy to be stable
BELDON Reply
what measures are necessary to the economy which is not doing fine
BELDON
must find out the problems originating from and take remedy for it.
Rigved
Economics as a social science Discuss
Sire
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 .
Tantoh
labour force and technological progress leads to greater production increases the GDP
Ahmed
what is elasticity of demand
Jessica
degree of responsiveness of demand to changes in price and other factors that influence demand.
OBIAJULUM
It is the degree of responsiveness of demand and supply to a little change in price of a goods and services
Ibrahim
What is economics?
Bubu Reply
by this time
Emmanuel
It is a social science that analyses production,distribution and consumption of goods and services
Emmanuel
A social science that study human behavior in relationship with decision making
Jessica
a social science that studies human behavior as a relationship between ends and scarce means which has alternative uses
Charllote
it is a science that study human begin as a relation to ends and scarce should which have alternative uses
Ibrahim
the science in which we study about the investement of our wealth.
Atteq
what is competitive demand
joe
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
Yussif
what is different between equilibrium and demand?
Moses
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.
Yussif
list and explain three implication of balance of payment disequilibrium?
Jayson
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
explain the significance of concerpt of opportunity cost in planning
Mwanaid Reply
what is meant by the price elasticity of demand?
Martine Reply
when price of a commodity increase it's demand contracts , and whe the price of a commodity decreases it's demand expands so the degree of change in demand in response to change in own price of the commodity is called PED . Ed = percentage change in quantity demanded / percentage change in price
shaswat
What are the limitations of macroeconomic and their segnificant
Usman Reply
Discuss the role of competition in stimulating economic growth?
Daniel Reply
competition stimulate economic growth because in such types of economy,they is no monopoly power every supplier will want to produce to meet customers choice which brings about quality production and attract invested and customers into such economy
Koka
competition creates Monopoly because of economy of scale. it's not antithesis but different side of same coin
toko
competition result in high economic growth since every firm will intend to provide quality services and products to meet customers needs and requirements unlike in Monopoly situation where a firm just provide what it want to resulting in large stock piles of unwanted products ,ie inefficiency, howev
Mark
microeconomics study part of the economy but macroeconomic study the whole economy
Olokun Reply
studying the whole economy, solving the problem of the economy and building up the economy
Olokun
micro means small while macro means large
Olokun
standard of living is the footsteps of an economy because it plays important role for country to have crucial view about their budget ,import and export
Olokun
it will be differ because economic agent will only take their views on some part of household
Olokun
can opportunity cost be zero
OBED Reply
how many types of transportation do we have
Jacob
yes. when a customer's purchasing power is high, he may have d ability to purchase all he needs, dt makes opportunity cost zero
George
please can give more explanation on this question
OBED

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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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