Define and explain an Oligopoly - Characteristics of an Oligopoly An oligopoly is market form in which a market is dominated by a small number of sellers

GCSE Business Studies

Anand Thanky

Oligopoly

Define and explain an Oligopoly – Characteristics of an Oligopoly

Outline the various theories of Oligopolies, e.g. kinked demand curve etc

Collusion/Cartels – What are the costs and benefits?

Game theory – Is it a useful model?

Two case studies on Oligopoly markets

Define and explain an Oligopoly – Characteristics of an Oligopoly

An oligopoly is market form in which a market is dominated by a small number of sellers (oligopolists). The word is derived from Greek meaning few sellers, because there are few participants in this type of market, each oligopolist is aware of the actions of the others. Oligopolistic markets are characterised by interactivity. 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. An oligopy is a form of economy. As a quantative description of oligopoly, the four-firm concentration ratio is often utilized. 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%. An example would be the supermarket industry in the United Kingdom, with a four-firm concentration ratio of over 70%.

In an oligopoly firms operate under imperfect competition, the demand curve is kinked to reflect inelasticity below market price and elasticity above market price, the product or service firms offer are differentiated and barriers to entry are strong. 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.

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In industrialized countries oligopolies are found in many sectors of the economy, such as cars, consumer goods, and steel production. Unprecedented levels of competition, fueled by increasing globalisation has resulted in the emergence of oligopsony in many market sectors. For example, the aerospace industry. There are now only a small number of manufacturers of civil passenger aircraft. A further instance arises in a heavily regulated market such as wireless communications. Typically the state will license only two or three providers of cellular phone services.

Oligopolistic competition can give rise to a wide range of different outcomes. In some situations, the firms may collude to raise prices and restrict production in the same way as a monopoly. Where there is a formal agreement for such collusion, this is known as a cartel. 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. 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.

Outline the various theories of Oligopolies, e.g. kinked demand curve etc