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identify an oligopolistic industry in practice?

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Introduction

INTRODUCTORY MICROECONOMICS Autumn Term Essay Chosen Question: How would you identify an oligopolistic industry in practice? Use your criterion to identify one or more oligopolistic industries in the UK. From casual observation, to what extent do you think the behaviour of firms in the industry (industries) you have identified, corresponds to that described in any theoretical model of oligopolistic behaviour? An oligopolistic market or industry exists when it is dominated by a few large companies and a large proportion of the market is taken up by these companies. The word is derived from the Greek for few sellers1. It follows that these sellers are also dominant buyers in the industry too. Such a market or industry can appear to be highly competitive because each producer fights hard for particular market niches. However this competition is usually in non-price form, such as special offers and advertising because there is often a large degree of rivalry and collusion, which keeps overall prices and therefore profits at a reasonable level (Line/Marcous´┐Ż/Martin 2003). ...read more.

Middle

So demand is relatively inelastic below P1. 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. When oligopolies need to be defined in a quantitative way, the four-firm concentration ratio is often used. This ratio puts across the market share of the four largest firms in an industry as a percentage. When this measure is used, 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%1 and the brewery industry also in the U.K has a concentration ratio of a staggering 85%1. It is said that analysing the behaviour of firms in oligopolistic markets is extremely difficult as each company will be aware that whatever action it takes will most likely result in a reaction from competitors. Therefore it must attempt to take this reaction into account before undertaking anything (Line/Marcous´┐Ż/Martin 2003). ...read more.

Conclusion

This is due to the fact that there is little room for organic growth (growth from inside the firm, not from acquiring or merging) and so the only other option is grow externally i.e. through acquiring or merging. However, over the last few years, there has been much publicity over the rivalry between Tesco and Asda, the two market leaders in the industry, regarding the price war that exists between them. More recently, after merging with Safeway, Morrisons has become a third entrant in the price war. This sort of behaviour by these companies is not how the theory suggested, as they are competing on price. Tesco is taking this price war so seriously, and so determined to stand for price leader, it places cards around its stores listing the prices of its goods compared to competition. It is evident now that even though a particular industry can be defined as an oligopoly, the firms within that industry do not necessarily behave as is assumed. The extent to which firms do behave as described in the theory will obviously depend on the industry concerned, and oligopolistic behaviour will be greater in some industries, e.g. the construction industry or the chemicals/oils industries, than others. ...read more.

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