Oligopoly Market

Oligopoly Market

Oligopoly, the market situation in which a product is supplied by a small number of firms whose activities and policies are determined by the expected reactions of one another. The essence of oligopoly is thus mutual interdependence between firms. For simplicity it is sometimes analysed as duopoly, the case of two suppliers. If there are two firms making the same (or a similar) product with a significant share of the market, each knows that a decision about its price or output will affect the other. It must therefore judge its policy by the other's likely reaction to it. Mutual interdependence emerges only with small numbers of firms. If the number were large, i.e. the market were highly competitive, each could suppose it had no influence on any other so that no reactions need be considered. At the other extreme a monopolist need not consider reactions since there are no other firms to react.

Oligopoly creates special problems of analysis. Since in oligopoly each firm acts by mutual reaction and interaction, there is uncertainty. The duopoly (or oligopoly) problem is like a game of cards, a diplomatic battle or a contest in strategy.

Imperfect competition and monopoly it is possible to say from first principles what price and output will be. In oligopoly each firm can make more than one assumption about the behaviour of the others. Two cases may be considered with two firms A and B. The first is duo-poly (or oligopoly) where the product is homogeneous: A and B produce identical goods. In the second there is product differentiation: A and B produce goods which are not identical in the eyes of consumers. In the first case consumers are as willing to buy from A as from B. Hence there can be only one price for the product; but it is difficult to know what it will be. The firms might, by collusion, or by chance, behave as if they were (jointly) monopolist. If they engage in a price war, each following the other in cutting price, the result will be closer to a perfectly competitive solution. The larger the number of firms, the less the likelihood of collusion and the more the situation will approach that of perfect competition. In the second case, where each financier has a more or less separate product, price cutting has not the same effect: each producer may be able to alter his price without (or with less) fear of reaction; but a price-war seems less likely since the effect of a cut, for example, is damped down because the products are not quite the same. A monopoly solution by merger or collusion is also less probable because each firm will want to continue independently to supply the customers who have become attached to it. In the teal world the uncertainties of oligopoly probably encourage policies of seeking a quiet life rather than maximizing profit.

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