Oligopoly

Oligopoly: Overview

  • An Oligopoly is a market structure where a few firms dominate. These firms typically sell homogenous or differentiated products.
  • In an oligopoly, firms may behave competitively or collaboratively. The actions of one firm can significantly impact the market and other firms.

Characteristics

  • Few Dominant Firms: The market is typically dominated by a small number of large firms, each of which has a significant market share.
  • Interdependence: Due to the tight competition and influence, firms must consider the likely reactions of their rivals when making decisions.
  • Barriers to Entry: Presence of high barriers to entry prevent new firms from entering the market easily, thus protecting the strong position of the existing firms.
  • Non-Price Competition: Similar to monopolistic competition, firms often compete through advertising, quality, branding and other means not related with price.

Oligopoly Models

  • There are two main theoretical models in oligopoly: the Cournot-Nash Model, where firms compete on quantity, and the Bertrand Model, where they compete on price.
  • Under the kinked demand curve model, firms face a highly elastic demand curve for price increases and a less elastic one for price decreases, explaining why oligopolistic prices can be sticky.

Efficiency

  • Productive efficiency is generally unlikely as firms do not produce at the minimum point of their average cost curves.
  • Allocative inefficiency is likely as price is higher than marginal cost due to the market power of the oligopolists.
  • X-inefficiency may occur due to lack of competitive pressure, but dynamic efficiency may be improved due to high profits and potential for investment in research and development.

Advantages and Disadvantages

  • Advantages: Potential for economies of scale, potential for greater innovation, and stability in prices may benefit consumers.
  • Disadvantages: High barriers to entry may limit competition, potential for anti-competitive behaviour, and prices may be higher than in more competitive markets.

Relevance to the Real World

  • Oligopoly is common in industries where economies of scale are significant, such as the automotive industry, telecommunications, and airlines. This makes understanding it invaluable in grasping the economic dynamics of such vital sectors.