The characteristics of an oligopolistic market structure include interdependent decisions, a kinked demand curve, and competitive behavior among firms. Interdependence means that each firm takes into account the pricing and output decisions of other firms while making its own decision.
This leads to a kinked demand curve which shows how other firms respond when the price of a product is changed. Lastly, competitive behavior among firms means that each firm tries to outdo its competitors by providing better products or services at lower prices.
The photographic equipment industry is an oligopoly market structure, with high entry and exit barriers, which makes it difficult for new entrants to enter the market. Key characteristics of oligopoly market structures are high concentration, mutual interdependence, price leadership, and non-price competition. The competitors in this market structure are few in number, and they are able to influence each other’s decisions.
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What is Oligopoly?
An oligopoly is a market structure in which there are only a few firms that dominate the industry. It is commonly seen in the automobile, airline, steel, and oil industries where only a few firms produce the majority of products or services. For example, the oil industry is largely dominated by only a few large companies.
Oligopoly markets are characterized by only a few firms dominating the industry and this makes it difficult for new firms to enter the market as they cannot compete with the established ones. This can also lead to higher prices and less innovation in the industry.
An oligopoly is a market structure where two or more firms dominate an industry. Characteristics of oligopoly include price rigidity, product differentiation, interdependence, and barriers to entry. The automobile industry, steel industry, airline industry, and oil companies are all examples of oligopolies.
In an oligopoly market structure, firms have the ability to manipulate prices and increase profits. This is due to the few number of large producers in the industry. With few firms, any one firm in the market can significantly impact price and supply. As a result, firms may try to increase prices and limit production in order to gain larger profits.
Characteristics of Oligopoly
1. High Barriers To Entry
Oligopoly markets have high barriers to entry. This means that it is difficult for new firms to enter the market as they are unable to compete with the existing ones.
The price-making powers of large firms also make it hard for newcomers to enter.
2. Price Making Power
Oligopolies have significant pricing power, meaning they can charge prices that are much higher than what they’d be able to in more competitive markets.
This is because a few large firms can collude and set a market price, making it difficult for other firms to enter and undercut them.
3. Interdependence Of Firms
In an oligopoly market structure, each firm takes into account the pricing decisions of its competitors while setting its own prices.
That’s because any change in price by one firm will directly impact the profits of other firms as well.
4. Differentiated Products
Oligopolies usually produce products or services which are either differentiated from their rivals or have some kind of brand loyalty associated with them.
This makes customers less likely to switch providers even when there are lower prices available elsewhere.
5. Non-Price Competition
This helps them gain an edge over rivals and increase market share.
6. A Few Firms with Large Market Shares
In oligopoly markets, a few large firms dominate the industry and control the majority of the market share.
This makes it difficult for new entrants to compete with established ones even if they offer lower prices or better products or services.
7. Few Sellers
Oligopoly markets are characterized by only a few sellers who produce most of the goods and services being offered in the market.
This makes it difficult for new firms to enter the market and compete with existing ones.
8. Each Firm Has Little Market Power In Its Own Right
In an oligopoly market structure, each firm has only little market power in its own right as all of them are dependent on the pricing decisions of other firms.
This means that any change in price by one firm will have an impact on the profits of other firms as well.
9. Higher Prices than Perfect Competition
Oligopoly markets tend to have higher prices than the perfect competition due to the pricing power of large firms, lack of competition, and lack of incentives for firms to lower their prices.
This can lead to higher profits for these firms but can also be detrimental to consumers.
10. More Efficient
Oligopoly markets tend to be more efficient than perfect competition as they allow firms to take advantage of economies of scale and focus on producing the best quality products at the lowest cost.
This helps them achieve higher profits without having to worry about competing on price.
This helps them gain an edge over rivals and increase market share, even when other firms offer lower prices or better quality products.
12. Group Behaviour
In oligopoly markets, firms usually act in a group rather than individually due to interdependence among them.
This means that each firm takes into account the pricing decisions of its competitors while setting its own prices.
Oligopoly markets are characterized by competition among a few large firms as opposed to a perfect competition where many small firms compete against each other.
This means that these firms can collude and set a market price, making it difficult for other firms to enter the market and undercut them.
14. Barriers To Entry Of Firms
In oligopoly markets, there are usually high barriers to entry due to economies of scale, the presence of large firms, and brand loyalty from customers.
This makes it very difficult for new entrants to compete with established ones even if they offer lower prices or better products or services.
15. Lack Of Uniformity
Due to the number of firms in the market and their different strategies, oligopoly markets lack uniformity.
This means that prices charged by each firm can be quite different from those set by its rivals.
16. Existence Of Price Rigidity
Since firms in oligopoly markets depend on the pricing decisions of other companies, prices often stay steady.
This is known as price rigidity and it can lead to reduced competition in the market and higher prices for consumers.
17. No Unique Pattern Of Pricing Behaviour
In oligopolistic markets, the pricing strategies adopted by firms are not constrained to any one particular pattern.
This means that each firm has to take into account the pricing decisions of its rivals and adjust its own prices accordingly in order to remain competitive.
18. Indeterminateness Of Demand Curve
In oligopoly markets, due to the fact that firms are interdependent on each other’s pricing decisions, it is difficult to determine a unique demand curve for any given product or service. This means that firms have to rely on the pricing decisions of their rivals in order to set their own prices.
Overall, Characteristics of oligopoly markets include higher prices than perfect competition, more efficient production, advertising campaigns, group behavior among firms, barriers to entry of firms, lack of uniformity in pricing amongst competitors, and the existence of price rigidity.
Furthermore, these markets are characterized by no unique pattern of pricing behavior and the indeterminateness of the demand curve.
Types of Oligopoly
Pure Oligopoly: In a pure oligopoly, there are only two or three firms in the market that are not influenced by any other firm. This oligopoly environment is rife with fierce competition, as each business relentlessly fights to dominate the market.
Imperfect Oligopoly: In an imperfect oligopoly, there is more than one dominant firm but the market is still dominated by a few key players. In this type of oligopolistic market, companies work together to maximize their profits by fixing prices and engaging in less fierce competition.
Open Oligopoly: In an open oligopoly, there are many small firms in the market that can compete with each other but are not able to gain control over the entire market. This oligopoly is marked by price battles and strategic campaigns, as each company attempts to capitalize on the adversaries’ vulnerable spots.
Closed Oligopoly: In a closed oligopoly, there are few firms in the market and they have gained dominance over the entire industry. In this form of oligopoly, firms have secured a certain degree of market dominance, leading to an absence of competition.
Collusive Oligopoly: In a collusive oligopoly, firms form agreements to set prices and production levels in order to maximize their collective profits. Oligopolies of this nature are typified by both price stability and lucrative profits for all businesses involved.
Competitive Oligopoly: In a competitive oligopoly, there are few large firms but they compete aggressively with each other through pricing strategies, promotions, and advertising campaigns. This oligopoly structure is typified by fierce rivalry and prices that are considerably lower than those encountered in traditional or distorted oligopolies.
Partial Oligopoly: In a partial oligopoly, there are a few large firms that dominate the market but there are also many small firms that compete with each other. This oligopoly is defined by the intense rivalry among small firms and an incapability to control the entire market by any one firm.
Total Oligopoly: In a total oligopoly, only one firm has control over the entire industry and its pricing strategies govern the market. This type of oligopoly is known for its stable prices and exceptional returns to the primary business.
Organized Oligopoly: In an organized oligopoly, several large firms cooperate with each other in order to gain control over the entire market. This type of oligopoly is characterized by stable prices and increased profits for all participating firms.
Syndicated Oligopoly: In a syndicated oligopoly, several firms join together in order to gain control over the entire market. This type of oligopoly results in steady pricing increased profits for the firms involved, and a decrease in market competition.
Examples of Oligopoly
Motor Vehicles in the US: In the United States, motor vehicles are a prime example of an oligopoly. The US market is primarily dominated by three firms: General Motors, Ford, and Chrysler, which together account for approximately 70% of the total sales.
News Media: The news media industry is another example of an oligopoly, as there are only a few large media companies that control the entire market. These companies, such as NBC Universal, Disney, and Time Warner, are known for their immense power when it comes to influencing public opinion.
Breakfast Cereals: The breakfast cereals industry is an oligopoly in which only a handful of firms have significant control over the entire market. Companies like Kellogg’s, Quaker Oats, and General Mills dominate the global market for breakfast cereals.
Mobile Phones: The mobile phone industry is dominated by a few large players such as Apple, HTC, and Samsung. These companies have secured an overwhelming portion of the total market share, leaving only marginal room for new entrants or small businesses.
Beer: The beer industry is a prime example of an oligopoly, as it is dominated by only a few large firms. Companies like Anheuser-Busch InBev, MillerCoors, and Heineken control more than 70% of the total market share in the United States.
In the end, oligopoly industries have characteristics that make them distinct from other market structures. They work in a competitive market and require businesses to be savvy in order to stay competitive.
Oligopoly industries can be difficult to enter and exit, as the few firms in the market tend to hold significant market power. Market forces of demand and supply still apply, however firms are more likely to focus on strategic pricing decisions in order to maximize profits. The marginal revenue curve is an important concept to understand in oligopolies, as it can provide guidance on how much revenue a firm will gain from a given price.
Understanding the oligopoly characteristics will give businesses an edge in making strategic decisions and staying competitive in their markets. In a world of intense competition, businesses in these industries must be prepared to adapt quickly in order to remain successful.
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