Oligopoly
Oligopoly is a specific type of flawed competition market structure where the few large firms compete and interact with one another while concentration in the share of the market they have. The conditions and doctrines of the oligopoly construct are centred on a similar setting. An oligopoly is vastly comparable to a monopoly where one firm controls the market. Still, in oligopoly, at least two companies dominate the market where they can influence the price of the products in those markets. The central element of the companies in an oligopoly is the independence between the firms which indicates that every company should consider other firms before making changes on the prices. Companies in these market produce products that are typically similar and are striving for market share. Since they’re more than one firm in oligopoly, one company cannot be thoroughly dominant in the market. However, each firm cannot hinder the other from making significance influence in the market.
A predominant problem in economics is how various market structures alter economic performance where it can be either favourable or unfavourable to technological progress. Some legal and financial trepidations is that oligopoly can raise prices, decelerate innovations, and hinder the new entrants, which results in harming the consumers. Businesses in oligopoly situate costs under the guidance of a particular company or collectively together, which allows them to increase their profit margins, unlike in terms of a competitive market where process ratings are not made from the market.
Existence of Oligopolies is enabled by various conditions including a stand that acquires value with more clients, legal benefit where the firms are given licenses to build or use resources, and high entry costs in investment outlay. These firms stay stable because they choose not to compete and instead settle on the benefits of collaborating. Sometimes to appear not to be fixing prices, the lead firm would raise its prices, and the other would follow. However, the major issue these companies experience is that each company has an inducement to swindle. For instance, when the companies agree to keep the prices high by mutually confining supplies, one undercut the others by breaking the agreement to capture substantial business. Such rivalry can be fought through increasing the products taken to the market or through prices. Game theoreticians created models for such a scenario where benefits and costs are balanced so that all firms want to stay in the group and hence agree to its strategies. This is regarded as the Nash equilibrium condition for oligopolies. This condition is achieved through tactical relationships, legal limitations and market situations among the firms in the oligopoly were they enable some punishment to the rule-breakers.
Interestingly the issue of managing action between sellers and buyers in typically on the market and the challenge of sustaining an oligopoly entails shaping the pay-outs to connected synchronisation games that occur repeatedly. Therefore, several organisational aspects that accelerate the progression of market finances by decreasing issues between the market accomplices such as the laissez-faire economic contract, legal situations of reciprocity and extreme trust, and assured enforcement of agreements which also potentially assist in sustaining and encouraging oligopolies.
Sometimes the government might react to oligopolies with policies against collusion and price-fixing. Still, in diverse markets, the firms in oligopolies search and lobby for good government law to trade some regulation, including direct observation by administration representatives.
In a sense, a market is regarded as a perfect completion environment when there is free exit and entry in the market, several firms, firms have the independence of making decisions regarding products and prices, an identical product and the seamless participants’ knowledge of the market. The oligopolies are formed when the conditions of the perfect rivalry market are disturbed causing the rise of few sellers with several buyers. These sellers identify that they generate identical products and that they together with their competitors have control over prices of their goods. An oligopolistic distinguishes this common liberation between the firms and that profit maximisation will depend on all the firms’ behaviours. The sellers recognise their degree of power on the market share where their choices affect prices which do not rely on the total firm size but instead of the company size with the market. These identifications compel the firms to start colluding to coordinate their product and prices policies to escalate their gains.
Because of the small number of dealers in oligopoly, it is easy to detect the actions of the competitors. The game theory indicates that decisions or choices of one company affect the options of the other companies. Tactical design of the firms takes into consideration the likely reactions of other participants in the market. Oligopolies are from other market structures on prices where they look for favourable output-price arrangement instead of the supply curve.
Oligopolistic competition often offers ascent to diverse and wide-ranging consequences. For instance, specific firms may engage in obstructive business practices such as market sharing or collusion to restrict production and raise prices. Such formal cooperation among the firms generally contends with each other hence identified as a cartel. Corporates frequently collude to steady a volatile market for product development and the reduction of the inherent risks in the market. When formal collusion is impossible, the firms collaborate and recognise a market leader which unofficially places rates which other manufacturers react to which s known as price leadership. In another setting rivalry among the oligopoly, members could be very ferocious with relatively high production and low prices. This could precedent to a significant result advancing flawless strife. In an oligopoly, rivalry can be vaster where there are several companies in a business that when, for instance, the companies are locally centred. They do not rival directly with one another. Therefore, the prosperity evaluation of oligopolies is profound to the restriction standards utilised to describe the markets construct. Specifically, the degree of total losses is difficult to evaluate. A review of produce differentiation states that the oligopolies could build unwarranted stages of differentiation to suppress competition.
The features of an oligopoly are that it has profit growth environments where firms in this market have the benefits of intensifying their gains. They also can alter prices to their advantage. The exit and entry barriers are very high. The utmost significant obstacles are the entry to complicated and expensive technology, economies of scale, the tactical activities by incumbent companies created to destroy or discourage budding companies, patents and government licenses. Additionally, the entry barrier is often influenced by government regulation that favour prevailing companies and make it difficult for nascent companies to access the market. The high barriers also provide another oligopoly aspect which is the retention of abnormal profits by the existing firms since the barriers ensure they continue capturing the excess gains. The firms only being a handful or a few numbers is another aspect of oligopoly firm where actions of a single company affect the rest members of the oligopoly. Another factor is in product differentiation where the products can either be distinguished or homogenous.
Perfect knowledge is another element where the firms have the experience of their demand and cost functions through their collaborative information may be partial. On the other hand, consumers have insufficient knowledge to cost, price and merchandise quality. The competition between firms in oligopoly tends to be of other terms rather than the price. For instance, through product differentiation, advertisement and loyalty schemes. Finally, the unique aspect of oligopoly is interdependence, where firms in this market structure are large to the extent that their deeds alter market environments. Thus the rival companies would be aware of those actions and react adequately. This indicates that in anticipating market activity, a company should take into deliberation the probable responses of the other rivals companies and their countermoves. The firm must anticipate the moves of the other participants to be able to establish how to attain its objectives. For instance, an oligopoly contemplating decreasing its product prices would evaluate the probability that the rivals’ companies would also lessen the costs and probably prompt a violent price feud. Similarly, if the company want to raise its product prices, it would consider whether the rest of the firms will do the same or maintain the prevailing rates constant. This keenness creates rigidity of prices since all firms would only change their capacity of production or prices depending on the market’s price leader. This level of need and interdependence to be concerned about what other companies might do or are doing contrasts other market structures where there is no interdependence since no company is vast enough to influence market prices.
In this paper, the oligopoly makes heavy use of game theory to standard the conduct of oligopolies which entail Bertrand’s oligopoly where companies instantaneously choose prices, Cournot’s duopoly where the companies concurrently choose capacities and Stackelberg’s duopoly where the companies move chronologically. The complexity and variety of models exist since two or more companies are rivalling based on quantity, marketing, technological innovations, price, reputation and marketing.
Aim
The purpose of this study is to identify the conditions and principles of the market structures of the firms existing in oligopoly and noting the barriers that new entrants endure as they try to access this form of market structure. Moreover, the purpose of the study is to identify the typical model of oligopoly and how they are used by the existing firms and the new entrants in the market. The paper also illuminates on the impact of the new entrants when they join the oligopoly. Finally, the study aims to extend some studies that have been researched by various theorists and economists up until currently while applying the different oligopoly models.
Problem statement
The entry setting in oligopoly competition comprises of entry barriers that can be overwhelming to new firms that want to join the sort of market. These barriers are wide-ranging, including government regulations, retaliation from existing firms and customers being loyal to the established brands. If these barriers continue hindering the new entrants into the market, they would be innovation and technological hindrances in addition to continued harming to customers as the existing firms continue fixing prices to acquire maximum gains. The entry of new companies would be beneficial since they create a considerable impact to the market where they can improve innovation and dilute the market to allow perfect competition. To reduce the effect of these barriers, the government should change policies to allow entrants to have access to resources and reduce the regulation laws which would enable the new entrants to thrive in such a market structure.
Significance
The oligopoly market research is rich with several studies that have reviewed the market structure and behaviour of the oligopolistic firms. The results of this study are significant because they will indicate the how new entrants in the market are faced with high barriers not just from the existing firms that want to protect their market share but also by the government through regulations that hinder the new entrants from accessing the resources. This study will be beneficial to new entrants who want to join to join an industry where firms have created oligopolistic teams that dominate the market share and control the prices.
Methodology
The data that was used in this thesis was collected from external secondary sources, mainly existing data from various article and reports by several researchers regarding the oligopoly matters. This type of data collection is suitable for this thesis because it provides past information that has been gathered through qualitative and quantitative techniques researched and analysed. Furthermore, the data in these sources is based on some of the best authors who make it relevant to the research. The specific information from this source includes the oligopoly market structure, the barriers to entry in oligopoly and the impact of new entrants in oligopoly. The data was able to answer all the research questions on market structure, entry barriers and effects of new entrants. For relevant results, the study uses other sources to verify the information of the sources and deem it credible.
Conclusion
This paper is an extension of various studies that have established the theories and models of the oligopolistic market structure. In this type of market, unlike other market structures, there are high entry barriers since the firms are mostly large and dominate the market where their action affects market performance. According to this study, oligopoly entails the huge sellers in a few firms who have the power to alter prices and block new entrants. However, the firms cannot hinder the performance of their competitors in the market. To evaluate the strength of their rivals, a firm uses the IHH which catalogues the intensity of the market structure.
Oligopoly comprises of seral models, but the unique ones used in this research include Cournot’s, Stackelberg’s, Bertrand and Sweezy. In Cournot’s competition, the industry allows the few firms to compete centred on the output capacity they produced. Stackelberg modifies Cournot’s model, but he stipulates that one firm may want to establish its ability by producing more before the other firms. Bertrand, he chose the value over quantity and showed that firms in an oligopoly could join a non-aggressive behaviour. Sweezy model was created on the assumption that companies will react to price exactions than reductions. These models produce a coherent context that can be utilised in evaluating collaborations in the oligopolistic.
As explained by various authors in the research, the game theory has been used several times both by the existing firms and new entrants in the oligopoly to predict the probabilities of competition’s activities. However, game theory is also subjected to several limitations because of its inability to deliver in the real world scenario. The barriers to entry are high and complex in this market structure. They include reputation barriers where the customer prefers the already established brands. The distribution barriers where new entrant are locked away from the supply networks. The scale and familiarity where the large established firms can produce more, unlike the developing firms. The advertisement which means that the incumbents can advertise more and through better means of reaching clients. Technology where the existing firms have already established machinery and acquire rare and valuable technology. Finally, the government regulations which instil policies that hinder entrance and survival of new firms.
New entrants to some extent affect the oligopoly market structure in that they reduce the control which the existing firms have over the price. The incumbents try to block entrants from entering the market because the dilute the market share reducing both their profits and the size of the customers who move to buy brands from the new firms. The entrants also improve the technology and innovation by coming up with new ideas that ae not with the existing firms. The impact of the new entrants is vast since they increase the competitions, which makes the barriers high to prevent them from disturbing the flawed completion into perfect competition.