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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 economic
Olriema Reply
what the word federal mean
Kabba Reply
Meaning of "movement along curve?
Lizabeth Reply
There is movement along curve whenever the 'price' is affected
Isha
its mean price is positively response as demand change and price is negatively reaponse as supply changes
Mudasir
its mean when quantity demanded of commodity changes due to a change in its price ,keeping other factors constant, it is know as change in quantity demanded.
Gyamfua
pleas wat the formula when calculating for equilibrium point
Irene
when there is increase in the price
sautil
when there is increase in demand, demand will decrease.
Shadrick
A movement along curve is a movement on the curve mainly caused by a change occured in both quantity demand and quantity supplied.
Aarohi
what is demand
Dennis Reply
unwilling to buy good quality at a particular price and a particular time
Musa
Demand is the willingness and ability to buy goods and services at different prices at a given time.
Aarohi
is production function different from psychological law of consumption?
Kshirodra Reply
why supply is not the same quantity supplied
emmanuel Reply
What is Elasticity?
Kamara
I don't even understand
Awuah
what is damand
Cletus
Elasticity is an economic concept used to measure the change in the aggregate quantity demand for a goods or service in relation to price movements of that goods and service.
Gyamfua
Demand is an economic principal referring of a consumers desire to purchase goods and service and willingness to pay a price for a specific goods or service.
Gyamfua
supply is not the same as quantity supplied, because when economic refer to supply, they mean the relationship between a range of price an the quantity supplied those price -are relationship that can be illustrated with a supply curve or supply schedule
Gyamfua
Is a science which study human behavior as a relationship between ends and scares means which have alternative uses
BOOMBA Reply
I dont think so
Mahmood
It is Economic growth and stability
Mahmood
How Economic recovery growth Planning
Mahmood Reply
Expatiate your question
Awuah
Yh
Berry
Are bonds the same as liabilities?
Anderson Reply
Demend create it own supply how?
Mahmood
what is way ofrece thinking
Mahmood
what is the Economic way thinkig?
Mahmood
what is gasoline
Deepak Reply
how to know which products demand
Deepak
in other words economic can be define as what?
Ojarigho Reply
what is the difference between economics activities and economics system
Joshua Reply
what is the difference between price elasticity of demand and income elasticity of demand
Ellen Reply
what is demand
Alpha Reply
What is demand
Musa
is a measure of responsiveness at which a consumer is willing and able to offer a particular product at a given period of time
Manu
what is consumer
chill 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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