Effect of Oligopoly on Economy

1549 WordsOct 21, 20087 Pages
OLIGOPOLY INTRODUCTION In this topic the oligopoly form of market is studied. You will learn that fewness of firms in a market results in mutual interdependence. The fear of price wars is verified with the help of the kinked demand curve. Collusive forms and non-collusive forms of market are analyzed. The economic effect of the oligopoly form of market is presented. OLIGOPOLY CHARACTERISTICS The oligopoly form of market is characterized by - a few large dominant firms, with many small ones, - a product either standardized or differentiated, - power of dominant firms over price, but fear of retaliation, - technological or economic barriers to become a dominant firm, - extensive use of nonprice competition because of the fear of price…show more content…
Such a concerted and deliberate action is the form of collusion which is prohibited. OLIGOPOLY PROFIT The profit of firms in oligopoly is determined exactly in the same fashion as in other forms of markets: from optimum quantity where marginal revenue equals marginal cost, price is determined on the demand curve and unit cost on the average total cost curve. However, this determination may be affected by the kinked demand curve. Furthermore, in a collusive oligopoly, all the firms act as if they constituted one monopoly and the output is divided up among firms. OPEC acts as a monopoly by restricting output of its members with quotas. Each member shares in the profits of the would-be monopoly, but does not set price and output independently. CARTEL A cartel is an official agreement between several firms in an oligopoly. The agreement sets the price all firms will charge and often specifies quotas or market shares of the various firms. Cartels are illegal in most countries of the world. OPEC is a major example of a cartel. It exists because it is beyond the control of an individual country. OPEC is naturally the prototype of a successful cartel. Output quotas of its members produced staggering price increases (from $1.10 to $11.50 per barrel in the early 1970's, and up to $34.00 in the late 1970's: an increase of 3400% in ten years). Recent OPEC difficulties are also characteristic of cartels: new
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