<< Chapter < Page Chapter >> Page >

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 economics
Mohamed Reply
what is economics
Mohamed Reply
what is the basic economic problem
John Reply
what economics is all about?
Nomuhle Reply
what is a new paradigm shift
Austen Reply
Paradigm shift it is the reconcilliation of fedural goods in production
factors that affecting economic system
Bemen Reply
what is microeconomics
Nkanyiso Reply
what is the main problem in our economy
what does crux mean
what is demand
Jervis Reply
what are the factors of demand
What is money and banking
Dorcas Reply
which one of the bank do product money
central bank
no .... all bank its self...
commercial banking
different types of products banking are .... 1 bills of exchange, 2 leasing, 3 project finance and so on
Demand and supply
money can be defined as a medium of exchange
how third party insurance premium is calculated?
Eshetu Reply
why scarcity is a problem in economics.
don't worry about it, it's everywhere b/c no resources are full off in the world, b/c geometric increase of population growth.
price elasticity of demand is a percentage change in quantity demanded/percentage change in price.
Fadiga Reply
what is the formula for elasticity
Favy Reply
please be specific. Is it elasticity of demand or supply
we do not have a specific formulae for elasticity but we do have formulae for the types of elasticity and these are the types.Namely price elasticity of demand,Income elasticity of demand and cross elasticity of demand. please be a specific with your question.
sorry elasticity of Demand
The elasticity of demand is the change in demand due to the change in one or more of the variable factors that it depends on. ... The responsiveness of the quantity demanded to the change in income is called Income elasticity of demand while that to the price is called Price elasticity of demand.
price-elasticity-demand-formula Price elasticity of demand = % change in Q.D. / % change in Price
what is socialist economics
andy Reply
socialist economics is diffined as the reduction in production possibility curve where as production possibility curve frontial is when it shows the reduction in business and it will also lead to ceteris paribus
Socialist economy, is a system of government, in which the means of product is in the hands of the government
Change in quantity supplied
Haja Reply
what happened when there is a decrease in investment ?
what is a minimum wage?
Haja: Change in Quantity Supplied mostly is associated with the supply curve and changes in pricing strategy in response to the changes in market conditions. May in which context are you asking it?
Simeon: When there is a decrease in the amount invested then the amount of funding available is less and the level of production is low leading to less amount of goods and services available for consumption in the economy. Increases on the other hand will lead to development if managed properly.
Otherwise, lead to Bankruptcy
Emelyn: Minimum Wage: This is the minimum sum of money that should be paid to employees across the country to be able to afford a life-style where they can pay their bills on time and have food on the table, roof over their heads and money to travel and commute to and from one place.
Thank you so much, AmarbirSingh Sandhu..
Career Progression and getting your investments right leads to wealth Generation and Management and Transfer.
Emelyn: Your Welcome.
assalam aleykum,I would like to ask if the world has not security what would happen?
how can we define marginal cost I mean I used TC devided Q but teacher said it is not true
could you give me exact formula
Emelyn this is the definition of minimum wages. Minimum wage is a least legal wage fixed above the equilibrium(market) wage by the legislative authorities below which it is illegal to employ labour in the labour market.

Get Jobilize Job Search Mobile App in your pocket Now!

Get it on Google Play Download on the App Store Now

Source:  OpenStax, Principles of economics. OpenStax CNX. Sep 19, 2014 Download for free at http://legacy.cnx.org/content/col11613/1.11
Google Play and the Google Play logo are trademarks of Google Inc.

Notification Switch

Would you like to follow the 'Principles of economics' conversation and receive update notifications?