Explain why oligopoly is a realistic market structure in most economies. (10)
Economics essay
Explain why oligopoly is a realistic market structure in most economies. (10)
An oligopolistic market is a market where there are a small number of firms which are interdependent and compete with each other. There are three main characteristics of an oligopoly, these are; firstly there is some product differentiation, secondly there a few dominant firms and finally each of the firms are interdependent.
All firms entering into specific markets are going to come up against restrictions and requirements. These are known as barriers to entry and are one of the main features of an oligopolistic market. The example that will be used for illustrating an oligopoly is the soft drinks industry. In this industry there are three main firms competing for market share and many other small firms making up around 20% of the world market. It is these smaller firms who suffer most from barriers to entry imposed on the market. The first barrier is that of branding. These new firms will have to produce a quality product to compete against these firms which have been on the market for a significant amount of time, this time would have led to consumer loyalty becoming apparent. Due to these products becoming established it means that potential firms to the market are going to face high sunk costs, in an attempt to make people aware of their products. Even when people are aware the price is still going to be relatively high due to the high capital costs encountered by the firm. This will possibly increase the price of the product leading to less demand for the product. This follows onto the theory of the kinked demand curve.
