Essay on oligopolistic behaviour

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Distinguish between a collusive and non-collusive oligopoly
 In an oligopoly there is a small number of companies who control a large share of the market. Between oligopolies there is one important distinction to be made: collusive oligopolies where all companies in the oligopoly follow the lead of the most powerful, thus acting virtually the same as a monopoly and non-collusive oligopolies where strict observations and reasoning of individual companies will cause a strong price rigidity.
 In a collusive oligopoly the companies collude to charge the same price, thus acting like a monopoly where the monopolistic supernormal profits are distributed between the different companies.
 Within a collusive oligopoly it is once again possible to determine between formal and tacit collusions, which function differently, but cause the same outcome. In a formal collusion the firms agree on a certain quantities to be produced or a certain price, the same aspects a monopoly can set. However in a tacit collusion the companies in an oligopoly will charge the same price by observing each others behaviour, which is possible due to the relatively small number of companies. Alternatively the companies may also simply follow the prices of the leading company giving the same effect. In both cases the price will settle at a supernormal profit, as the quantity will be set where MC=MR, giving maximum profits. Unlike the monopolistic alternate version, productive efficiency will never be an option, as the other companies in the oligopoly would be able to push out a company attempting such efficiency.

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 On the other hand in a non-collusive oligopoly the companies will not collude and will make their pricing decisions based on the actions and predicted actions of the other competitors within the oligopoly. In such a oligopoly a price rigidity will emerge, as the companies are unable to raise their prices - as the other companies will most likely not follow, thus the company will lose sales and thus in most cases profit. On the other hand lowering the prices is dangerous, as the other companies might under cut the company in question, thus possibly leading to a price ...

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