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An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). In Economics, market structure (also known as market form) describes the state of a Market with respect to competition Sao Paulo Stock Exchangejpg|thumb| Virtual market arena where buyer and seller are not present and trade via intemediates and electronical information For other uses of this term see Industry (disambiguation An industry (from Latin industrius, "diligent industrious" The word is derived from the Greek for a few over many. Greek (el ελληνική γλώσσα or simply el ελληνικά — "Hellenic" is an Indo-European language, spoken today by 15-22 million people mainly Because there are few participants in this type of market, each oligopolist is aware of the actions of the others. The decisions of one firm influence, and are influenced by the decisions of other firms. Strategic planning by oligopolists always involves taking into account the likely responses of the other market participants. Strategic planning is an Organization 's process of defining its Strategy, or direction and making decisions on allocating its resources to pursue this strategy This causes oligopolistic markets and industries to be at the highest risk for collusion. Collusion is an agreement usually secretive which occurs between two or more persons to deceive mislead or defraud others of their legal rights or to obtain an objective forbidden

Contents

Description

Oligopoly is a common market form. As a quantitative description of oligopoly, the four-firm concentration ratio is often utilized. In Economics, the concentration ratio of an Industry is used as an indicator of the relative size of firms in relation to the industry as a whole This measure expresses the market share of the four largest firms in an industry as a percentage. Using this measure, an oligopoly is defined as a market in which the four-firm concentration ratio is above 40%.

Oligopolistic competition can give rise to a wide range of different outcomes. Competition is a rivalry between individuals groups nations or animals for territory or resources In some situations, the firms may collude to raise prices and restrict production in the same way as a monopoly. Collusion is an agreement usually secretive which occurs between two or more persons to deceive mislead or defraud others of their legal rights or to obtain an objective forbidden In Economics, a monopoly (from Greek monos, alone or single + polein, to sell exists when a specific individual or enterprise has sufficient Where there is a formal agreement for such collusion, this is known as a cartel. A cartel is a formal (explicit agreement among firms Cartels usually occur in an oligopolistic industry, where there is a small number of sellers and usually involve

Firms often collude in an attempt to stabilise unstable markets, so as to reduce the risks inherent in these markets for investment and product development. Collusion is an agreement usually secretive which occurs between two or more persons to deceive mislead or defraud others of their legal rights or to obtain an objective forbidden There are legal restrictions on such collusion in most countries. There does not have to be a formal agreement for collusion to take place (although for the act to be illegal there must be a real communication between companies) - for example, in some industries, there may be an acknowledged market leader which informally sets prices to which other producers respond, known as price leadership.

In other situations, competition between sellers in an oligopoly can be fierce, with relatively low prices and high production. This could lead to an efficient outcome approaching perfect competition. In Neoclassical economics and Microeconomics, perfect competition describes a market in which no buyer or seller has Market power. The competition in an oligopoly can be greater than when there are more firms in an industry if, for example, the firms were only regionally based and didn't compete directly with each other.

The welfare analysis of oligopolies suffers, thus, from a sensitivity to the exact specifications used to define the market's structure. Welfare economics is a branch of Economics that uses microeconomic techniques to simultaneously determine Allocative efficiency within an economy and the In particular, the level of deadweight loss is hard to measure. In Economics, a deadweight loss (also known as excess burden or allocative inefficiency) is a loss of economic efficiency that can occur when equilibrium The study of product differentiation indicates oligopolies might also create excessive levels of differentiation in order to stifle competition. In Marketing, product differentiation (also known simply as "differentiation" is the process of distinguishing the differences of a product or offering

Oligopoly theory makes heavy use of game theory to model the behaviour of oligopolies:

Demand curve

Above the kink, demand is relatively elastic because all other firm’s prices remain unchanged. Below the kink, demand is relatively inelastic because all other firms will introduce a similar price cut, eventually leading to a price war. Therefore, the best option for the oligopolist is to produce at point E which is the equilibrium point and, incidentally, the kink point.
Above the kink, demand is relatively elastic because all other firm’s prices remain unchanged. Below the kink, demand is relatively inelastic because all other firms will introduce a similar price cut, eventually leading to a price war. Price war is a term used in Business to indicate a state of intense competitive rivalry accompanied by a multi-lateral series of price reductions Therefore, the best option for the oligopolist is to produce at point E which is the equilibrium point and, incidentally, the kink point.

In an oligopoly, firms operate under imperfect competition and a kinked demand curve which reflects inelasticity below market price and elasticity above market price, the product or service firms offer, are differentiated and barriers to entry are strong. In economic theory imperfect competition is the competitive situation in any market where the conditions necessary for Perfect competition are not satisfied The kinked demand curve theory is an economic theory regarding Oligopoly and Monopolistic competition. Following from the fierce price competitiveness created by this sticky-upward demand curve, firms utilize non-price competition in order to accrue greater revenue and market share. Sticky is a term used in the social sciences and particularly Economics to describe a situation in which a variable is resistant to change Non-price competition is a marketing strategy "in which one firm tries to distinguish its product or service from competing products on

"Kinked" demand curves are similar to traditional demand curves, as they are downward-sloping. They are distinguished by a hypothesized convex bend with a discontinuity at the bend - the "kink. " Therefore, the first derivative at that point is undefined and leads to a jump discontinuity in the marginal revenue curve.

Classical economic theory assumes that a profit-maximizing producer with some market power (either due to oligopoly or monopolistic competition) will set marginal costs equal to marginal revenue. Monopolistic competition is a common Market form. Many markets can be considered monopolistically competitive often including the markets for Restaurants, Cereal This idea can be envisioned graphically by the intersection of an upward-sloping marginal cost curve and a downward-sloping marginal revenue curve (because the more one sells, the lower the price must be, so the less a producer earns per unit). In classical theory, any change in the marginal cost structure (how much it costs to make each additional unit) or the marginal revenue structure (how much people will pay for each additional unit) will be immediately reflected in a new price and/or quantity sold of the item. This result does not occur if a "kink" exists. Because of this jump discontinuity in the marginal revenue curve, marginal costs could change without necessarily changing the price or quantity.

The motivation behind this kink is the idea that in an oligopolistic or monopolistically competitive market, firms will not raise their prices because even a small price increase will lose many customers. However, even a large price decrease will gain only a few customers because such an action will begin a price war with other firms. The curve is therefore more price-elastic for price increases and less so for price decreases. Firms will often enter the industry in the long run.

Oligopsonies

Oligopsony is a market form in which the number of buyers is small while the number of sellers in theory could be large. An oligopsony is a Market form in which the number of buyers is small while the number of sellers in theory could be large This typically happens in markets for inputs where a small number of firms are competing to obtain factors of production. This also involves strategic interactions but of a different nature than when competing in the output market to sell a final output. Oligopoly refers to the market for output while oligopsony refers to the market where these firms are the buyers and not sellers (eg. a factor market). A market with a few sellers (oligopoly) and a few buyers (oligopsony) is referred to as a bilateral oligopoly.

Examples

In the United Kingdom, the four-firm concentration ratio of the supermarket industry is 74. Customer divider barjpg|thumb|In supermarkets sellers periodically change prices for classes of goods in response to market conditions rather than negotiating the price of each good 4% (2006)[1]; the British brewing industry has a staggering 85% ratio. In the U.S.A., oligopolistic industries include the oil, beer, tobacco, accounting and audit services, aircraft, military equipment, and motor vehicle industries. The United States of America —commonly referred to as the

Many media industries today are essentially oligopolies. Six movie studios receive 90 percent of American film revenues, and four major music companies receive 80 percent of recording revenues. A major film studio is a movie production and distribution company that releases a substantial number of films annually and consistently commands a significant The music industry is the business of Music. Although it encompasses the activity of many music-related businesses and organizations it is currently dominated by the "big There are just six major book publishers, and the television industry was an oligopoly of three networks- ABC, CBS, and NBC-from the 1950s through the 1970s. Television has diversified since then, especially because of cable, but today it is still mostly an oligopoly (due to concentration of media ownership) of five companies: Disney/ABC, Viacom/CBS, NBC Universal, Time Warner, and News Corporation. Concentration of media ownership (also known as media consolidation) is a commonly used term that refers to the majority of the media outlets being owned by a small number of CBS Corporation () is an American Media conglomerate focused on Broadcasting, Publishing, Billboards, and Television NBC Universal is a media and Entertainment company formed in May 2004 by the combination of General Electric 's NBC with Vivendi Universal Time Warner Inc ( is the world's largest media and entertainment conglomerate, headquartered in New York City. News Corporation (often abbreviated to News Corp) (,,) is one of the world's largest media conglomerate companies by Market capitalisation [2]

In industrialized countries oligopolies are found in many sectors of the economy, such as cars, auditing, consumer goods, and steel production. The Big 4, sometimes written as the Big Four, are the four largest international Accountancy and Professional services firms which handle the vast majority Unprecedented levels of competition, fueled by increasing globalisation, have resulted in the emergence of oligopoly in many market sectors, such as the aerospace industry. Market shares in oligopoly are typically determined on the basis of product development and advertising. There are now only a small number of manufacturers of civil passenger aircraft, though Brazil (Embraer) and Canada (Bombardier) have fielded entries into the smaller-market passenger aircraft market sector. Embraer -- IPA [ɪ̃ⁿbɾaˈɛɾ] -- the Empresa Brasileira de Aeronáutica S Bombardier Inc (bɔ̃baʁdje is a Canadian conglomerate, founded by Joseph-Armand Bombardier as L'Auto-Neige Bombardier Limitée in 1942 A further instance arises in a heavily regulated market such as wireless communications. In some cases states have licensed only two or three providers of cellular phone services.

OPEC is another example of an oligopoly, although on the level of national bodies instead of corporate bodies. The Organization of the Petroleum Exporting Countries ( OPEC) is a Cartel of thirteen countries made up of Algeria, Angola, Ecuador There are a few countries that try to control the production of oil.

The city council of Arcata, California has passed a moratorium on marijuana dispensaries, grow facilities, and processing facilities. Arcata is a small city adjacent to the Arcata Bay (northern portion of Humboldt Bay in Humboldt County, California, United States. This moratorium freezes the ability to pass permits to open any of the above facilities. This has caused an oligopoly consisting of the three existing dispensaries not affected by this moratorium. The three dispensaries now have a government-enforced advantage.

Beat The Market is an economics game that simulates oligopoly and other market structures.

References

  1. ^ http://news.bbc.co.uk/1/hi/business/4785544.stm Probe says 'too few supermarkets' BBC News website, 31 October 2007
  2. ^ Rodman, George. Mass Media in a Changing World. New York: McGraw Hill, 2nd ed. 2008.

See also

External links

Dictionary

oligopoly

-noun

  1. An economic condition in which a small number of sellers exert control over the market of a commodity.
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