The upshot of the above discussion is that, like other markets, there is no single oligopoly model that can explain the behaviour of a seller. On the other hand, in oligopoly, a slight competition is there among the firms. The net result will be price -finite or price-rigidity in the oligopolistic condition. In this situation, if X wants to be cautious, it will be wise to cut price to £1. Both the firms are interdependent and they try to keep the same price. However, if the airline lowers its price, rivals would be forced to follow suit and drop their prices in response.
For example, if X retains its price at £2, the worst thing for X would be if Y decides to cut its price, then X profit will fall to £5million. Strategy Companies in an oligopoly typically undermine new competitors either informally though common pricing tactics or formally through the formation of a cartel. Oligopoly requires strategic thinking, unlike perfect competition, monopoly, and monopolistic competition. Interdependence: The firms under oligopoly are interdependent in making decision. This will therefore limit the ability of the group to act as a monopoly.
Hence, a far more beneficial strategy may be to undertake non-price competition. If both firms independently consider reducing their price to £1. There are different versions of cost-pus pricing, including full cost pricing, where all costs - that is, fixed and variable costs - are calculated, plus a mark up for profits, and contribution pricing, where only variable costs are calculated with precision and the mark-up is a contribution to both fixed costs and profits. The most distinctive feature of an oligopolistic industry is the interdependence among sellers. Hence, it can be regarded as a response to information failure. It is an economic situation where there is a small number of firms, selling competing products in the market.
Coca-Cola and Pepsi are examples of a retail oligopoly in the soft drink industry. Control over price Very considerable Some Basis of setting price Demand of consumers for the product. In case of Exxon Mobil the fixed cost may remain fixed both in the short and the medium term due to complacency factors although there might be certain modernization in the long run on the buildings and rigs. The only thing that the company ought to be aware of is that the state of complacency may set in if it does not try to keep itself in a competitive mode that is the characteristics of a monopoly business leading to its downfall in the long run. For example, if Texaco plans to increase its stake in the market by lessening the product price, it has to take into account the likelihood of its rivalries, like British Petroleum, reducing their prices as a consequence.
With the kinked demand curve, if demand or cost were to increase, firms will be tempted to increase their prices , but they will not because of the fear that competitors will not raise their prices and they will end up losing customer sales. Oligopsony A market structure in which there are few buyers of a product the market is called Oligopsony. Businesses can also sell to selective distribution channels, raising prices to enrich themselves and their partners. The changes could be in the form of new design, better quality, new packages or container, better materials, etc. Kinked demand curve The reaction of rivals to a price change depends on whether price is raised or lowered.
The elasticity of demand, and hence the gradient of the demand curve, will be also be different. Members of an oligopoly receive temporary benefits from limiting retail competition at the cost of harming society on a local or national scale. Tacit collusion Tacit Collusion is collusion that is not organized through a formal, open contract between colluding parties. Price rigidity: Under oligopoly there is the existence price rigidity. Under oligopoly with product differentiation each firm controls a large part of the market by producing differentiated product. In some oligopoly markets, producers also tend to share markets which often leads to inflation of general price level.
Such type of Oligopoly is found in the producers of consumer goods such as automobiles, soaps, detergents, television, refrigerators, etc. Above all, the complexities and diversity of oligopoly business makes analysis of price and output determination difficult. Thus, every seller keeps an eye over its rival and be ready with the counterattack. Whereas when a firm of an Oligopoly industry sale differentiated the product, It is called Heterogeneous Oligopoly. Another key feature of oligopolistic markets is that firms may attempt to collude, rather than compete. On the other hand, if X cuts its price to £1. When competing, oligopolists prefer non-price competition in order to avoid price wars.
Article Summary In this article Michael Baker discusses the livelihood of small retailers in a market subjugated by the financially dominant oligopolies, Woolworths and Coles. In order to compete, new entrants will have to match, or exceed, this level of spending in order to compete in the future. It may only have one shopping mall and a small number of stores present in a downtown area. Usually oligopoly is understood to prevail when the numbers of sellers of a product are two to ten. Strategic behaviour means when the best outcome of a firm is determined by the actions of other firms.
Oligopoly markets are bound to exist in all national economies, and it is the duty of producers to optimize their outputs, instead of just enjoying assured profits. There occurs a price-war in the oligopolistic condition. Moreover, such firms are considered to be profit maximizers. Types of Oligopoly Market : An oligopoly market is beset with the problem of price determination since the actions and reactions of rival firms vary from industry to industry. Examples of oligopolistic structures are supermarket, banking industry and pharmaceutical industry. It has some of the and some of the. The demand curve will be kinked, at the current price.
Therefore, according to them, the market structure is basically a manner in which markets are organized on the basis of a number of firms in the industry. The Trust Problem in the United States. The behaviour of a firm depends on how it thinks its competitors will react to its policies. Monopoly, as the name suggests, just has a single firm. One form of open collusive agreement is the formation of cartel. These are: Collusive oligopoly: This is an explicit or implicit agreement between existing firms to avoid or limit competition with one another. This is quite commonly observed in many economies, and is a significant contributory to economic growth and development in many nations.