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Major Characteristics of Oligopoly

Questions:

  1.  What are the main characteristics of an oligopoly? Give real world examples.
  2. Why could the market for Automobile be said to be oligopolistic?
  3. Why do you think that firms choose not to compete on price?
  4.  What are the main barriers to entry in the Automobile market?

Answer

Answers-

Introduction

The essential form of unsatisfactory rivalry is Oligopoly. The expression is the collaboration of two Greek term, including Polein meaning to sell and Oligi that mean few. It the form of promotion or marketing occurring at the time there are fewer sellers within the marketplace and sells similar product types. It lies between monopoly and monopolistic rivalry (Askar et al. 2018). Oligopoly is termed as rivalry amongst the few. In such a market situation, a single seller may impact the product’s price-output policy. The rationale behind it is that there remains less number of producers or sellers, where each company controls the large portion of the overall supply. During the products of the minority, sellers are distinguished; however, sellers remain close replacement of one another, then the term oligopoly will dictate within respective circumstances. 

Few examples or illustration of Oligopoly are-

The marketplace for automobiles, electronics and smart-phones are some illustrations of an oligopoly market. In each of this marketplace, there are only fewer sellers for specific products. One of the significant attributes of an oligopoly is termed as DUOPOLY. It remains a condition of the marketplace supremacy by two organizations. The two companies sell homogenous products, and you are likely to receive any replacement for those goods. 

The Boeing and Airbus Company are another example, where both firms control a huge portion of the marketplace. There also exist certain soft-drink marketplaces that are monitored by Pepsi and Coca-Cola. Moreover, some illustration of commercial aircraft marketplace is related as well. 

Oligopoly market category-

Depending on an attributes of an Oligopoly, it may be segmented into the subsequent categories:

Differentiated Oligopoly: It occurs during which the companies produces varying commodities; however, are the most replacement for one another. The sectors that might be noted under such situation are cigarettes producing organization, car manufacturing sector and industries of soft-drinks productions. Each firm's product will have its own specific attributes.

Non-conniving and manipulative Oligopoly: They are called as supportive Oligopoly. In here, the company collectively decide the costs or prices of the goods or products. On the contrary, there remains intense rivalry amongst the companies; such condition is known as non-conniving Oligopoly.

Perfect Oligopoly: It is noted to be ideal oligopoly situation when two firms provide homogenous products or goods (Vives 2001). Such a situation is often rare; however, aluminium, steel and chemical fabricating organization may be considered as untainted oligopoly sectors (Onofri & Boatto 2015). 

Attributes of Oligopoly-

The features of Oligopoly are quite exceptional, and these are absent within marketplace structure. Conversely, the following are certain important Oligopoly's characteristics:

  1. Group behaviour: It is an important characteristic of Oligopoly. In such circumstance, the companies will behave as they are one company yet separately they encompass own independence. The rationale behind it is that Oligopoly directs towards inter-dependence amongst companies. At the time of deciding product costs and output standards, a single company will regard the modification outlined by other companies. Conversely, oligopoly firms practice group discussion, irrespective of improving pricing tactics independently. The group conversation involves the concern of every company in the direction of enhancing the output and price standards. 
  2. Product types: The respective attributes of Oligopoly are segmented into two sections. Within Oligopoly, companies may develop the same type of products or distinctive goods that their rivals (Mazzeo 2002). During the time a company manufactures homogeneous goods, it is termed as ideal oligopoly situation. Additionally, in reference to different products, such a state is known as flawed Oligopoly.
  3. Indecisive demand-curve: Within Oligopoly, it is often hard to analyze the producer's behavioural pattern. This is the reason demand curve of the company remain indeterminate. Single slight alteration within the competition pattern may impact other company’s demand curve. In here, each company is interdependent and could not neglect a little response of the rival companies. Thus, these oligopoly attributes depict that within Oligopoly, the demand-curve quite uncertain and is always shifting (Bauer 2013). 
  4. Selling and advertising costs: In Oligopoly, the companies often have to select distinctive effective along with defensive selling technique to grasp a huge share within the market. They are likely to spend large amounts on promotional tools and on advertising (Rao 2015). Gazing at the utilization of marketing within Oligopoly, lecturers Baumol opined Oligopoly as the situations in which advertisement occurs individually and one may consider it true command of promotion.  
  5. Block companies to enter the marketplace: In Oligopoly, there is less number of companies, and the reason is that Oligopoly prevents organization to entry within the marketplace. They require large capital venture, fine patents, raw materials and others to continue to exist within such situation. The rationale that generate barriers are –
  • Possessing strong supremacy over important inputs and raw materials
  • The newest company will require huge capital to enhance their business  
  • A few industries of big-scale dictate the marketplace and benefit from the economic situation
  • The company will require exclusive copyright and patent to operate under Oligopoly

This is the reason oligopolistic companies may earn supernormal benefits.  

  1. No-price competing within the market: Under Oligopoly, the companies may easily motivate or control the costs. However, in such, they make efforts to neglect the kind of circumstances as they understand that may lead towards the price battle (Bauer 2013). This is the reason they opt for  the policy of price-rigidity. Within the price-rigidity guiding principle, the modification in supply and demand will not impact the costs of goods and linger constant. In case individual company increases the cost, the other form may not do the same as they might encounter the loss. This is the reason, and the firm prefers to lead the business under non-price rivalry (Vives 2001). 
  2. Inter-dependence: It means that in case of single company modifies their production or business behaviour; then they will impact the other company's activities. During determining the output level of production or development of pricing tactics, the company will investigate the activities of the rival organization. In case the company alters its output standards or product prices, it will impact the other organization functioning within a similar marketplace. For instances, if Honda alters their vehicle than, another automobile firm will lead the similar alteration within their vehicles to remain operating within the marketplace (Mazzeo 2002). 

Automobile marketplace as Oligopoly-

After understanding the attributes of Oligopoly, it is noted that there are fewer firms within the marketplace that provide homogenous goods and dictate the huge portion of marketplace share. This state of affairs is known as Oligopoly. The vehicle marketplace might be considered as the oligopoly marketplace situation.

The marketplace of Automobile validates one essential oligopoly attributes that hardly any manufacturer is there to control the market. In comparison to existing automobile marketplace scenario, it is often hard for the newest firm to enter such a market. The popular automobile sector companies such as Volvo, Mercedes-Benz, BMW and Ford has accomplished high-quality economic of scale across the globe. 

The barrier to enter the automobile marketplace-

In context to the case study, it has been observed that the oligopoly marketplace situation exists within the automobile marketplace. Such a situation makes it quite hard for the newest car manufacturer to enter who may rival against brands like Mercedes-Benz and BMD. One attribute of Oligopoly describes that the newest firm will require a large amount of raw material, exclusive patent and capital to initiate their business within the oligopoly marketplace atmosphere (Vives 2001). 

A new organization will be capable of surviving within the marketplace if the firm offers high-quality vehicle same as Mercedes-Benz. For the same, they require well-built capital. This element may widely impact them. Apart from this, the prior firms will not allow the newest organizations to penetrate the marketplace easily. An additional major element is the image, brand value along with reputation of a newest firm.

For the well-recognized and reputable firm, it is not hard to penetrate the oligopoly marketplace as they are already holding strong brand status (Mazzeo 2002). However, for the newest marketplace, they might not have an adequate brand name. Thus, the above-mentioned explainations has ultimately provided a lucid perception of the attributes of Oligopoly and the ways the oligopoly marketplace may impact the newest industry or sector. 

References 

Askar, S.S., El-Wakeel, M.F. and Alrodaini, M.A., 2018.Exploration of Complex Dynamics for Cournot Oligopoly Game with Differentiated Products.Complexity, 2018.

Bauer, P.T., 2013. West African trade: A study of competition, Oligopoly and monopoly in a changing economy. Cambridge University Press.

Mazzeo, M.J., 2002. Product choice and oligopoly market structure. RAND Journal of Economics, pp.221-242.

Onofri, L. and Boatto, V., 2015.Cournot Oligopoly, Homogeneous Products and Grappa Market: An Econometric Study (No. 01/2015). EERI Research Paper Series.

Rao, T.R., 2015. Strategic Behavior of Firms in Differentiated Oligopoly.International Journal of Applied Behavioral Economics (IJABE), 4(3), pp.51-62.

Vives, X., 2001. Oligopoly pricing: old ideas and new tools. MIT press.

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