Firms' Incentives to Avoid Price Competition in Oligopoly Markets

An oligopoly is a market structure that is composed of only a handful of companies that together have complete control over the sale of certain goods or services. In contrast, a “monopoly” exists when a one particular company is the only supplier of goods or services in a certain market. Examples of monopolies that we are familiar with include Ameren, the company that supplies our electricity and natural gas, and Illinois American Water, the company that provides our water.

As illustrated by Sloman and Hinde (2007), an Oligopoly by nature has price stability, even when there has been no collusion between firms. This theory is based on two assumptions. For example, if Tate and Lyle were to lower their prices, British Sugar and the other rivals would feel the need to follow suit to prevent losing customers to Tate and Lyle. Contrastingly, if British Sugar raised their prices, Tate and Lyle would not follow suit. They would keep their prices the same and gain customers from British Sugar. The kinked demand model illustrates this.

So firms in those industries can, to one degree or another, influence total supply through their own output decisions. In changing market supply, they also can influence product price. Firms with downsloping demand curves are price makers. (McGraw-Hill) Monopolists can charge higher-than-competitive prices that result in an under allocation of resources to the monopolized product. They can stifle innovation, engage in rent-seeking behavior, and foster X-inefficiency. Even when their costs are low because of economies of scale, there is no guarantee that the price they charge will reflect those low costs. The cost savings may simply accrue to the monopoly as greater economic profit.

Oligopoly is defined as a market structure in which there are a few major firms dominating the market in an industry. One of the defining factors is that each firm explicitly feeds off of the competitors' moves and their potential responses in regard to setting prices, launching new products, etc. Under this model there is a level of implied cooperation. The firms understand that it is in their own best interests to maintain a stable price. If one of the firms subsequently lowers their prices, their competitors will do the same and knock out any advantage the original firm was hoping to gain with lower prices. However, if they raise their prices, the competitors may not do the same and can keep their prices fixed which will allow them to gain more market share.

While a monopoly usually involves one firm with significant control on the market, an oligopoly contains a few firms. An oligopoly is a market structure where a few companies selling identical or differentiated products control the marketplace. The few players in an industry are usually quite large compared to the market for the product, thus giving these few players an advantage at market control. There are barriers to entry in oligopolies that include patents or government grants, ownership of resources, cost prohibitive barriers, brand equity and diminishing average cost.

Oligopolies stand distinctively different than other competitive markets in that they have a smaller impact area in price, output, etc. For example, an oligopoly would be a convenience store in an insignificant settlement competing against other convenience stores in the area. Moreover, organizations in oligopolistic market structures watch each other closely to ensure the other organization doesn’t upset the delicate balance of the current market. Additionally, organizations in oligopolistic market structures remain highly unstable and subsist prone to retaliation if provoked. Alternatively, a learning point to Oligopolistic market structures remains, one should avoid becoming so unique in ones’ organization as to make oneself a

As previously discussed, prices in the automotive industry tend to stick at their current set price and only increase or decrease within a small range. Since firms in an oligopoly do not compete by adjusting the price of their products, they compete using non-price related methods.

The natural monopolies have been subject to price controls by the government. The general aim of price regulation has been to protect consumers and ensure adequate output. For instance, in the case of a monopoly supplier of natural gas, once the pipes have been laid in an area, the marginal cost of adding an additional user is very low. With no regulation, the monopolist would produce where marginal revenue equals marginal cost. This is very inefficient, as the marginal cost will be less than price at the profit maximizing level of output. This implies that not enough service will be supplied and the price will be too high for some consumers to afford. Moreover, due to high economies of scale, it is hard to encourage competition.

An oligopoly describes a market situation in which there are limited or few sellers. Each seller knows that the other seller or sellers will react to its changes in prices and also quantities. This can cause a type of chain reaction in a market situation. In the world market there are oligopolies in steel production, automobiles, semi-conductor manufacturing, cigarettes, cereals, and also in telecommunications.

Oligopolistic is a market structure which under the imperfect competition. According to Sloman & Garratt, oligopoly is only few large firms share a large portion of industry and control the market. When we hear that a term about “Big three”, “Big four” or “Big five” it can be set down as oligopolistic industry. In the oligopoly market competition, depends on the firms produce homogeneous or differentiated products and it will be categorize as homogeneous oligopoly or differentiated oligopoly. As Mcconell & Brue, 2008 stated because of the small number of firms, oligopolistic have worthy of consideration command over the prices and they have to think about their competitors conceivable reaction to their product`s price, product`s quality, advertising outlays and so on. The few large firms are interdependent but they have to always be awake of competitor`s action to maintain their firm can stand strong in the industries. Oligopolistic have a strong barriers of entry for the new competitors, which alike and dedicative by the pure monopoly. According to Jackson, Mclver & Wilson stated oligopolistic industries have a large economies of scale have to be consider for the new competitors because they must have a large amount of capital to invest heavy on the technology in the beginning, and this is the prevention of new competitors can easily enter to the industry. Furthermore, there are many industries are counted as oligopolistic for instance mining, steel, soft drinks, airlines,

In oligopoly market, each firm has substantial market power with high degree of interdependence. The key for success in a oligopoly market is to gain more market share than the competitors. Increasing the price can lead to loss of market share to the competitors, so in the oligopoly market, if a firm decreases the price, the other firms will always follow, but if a firm increase the price, the other firms will not follow. The demand curve is kinked.

There are many characteristic of monopolistic competitions. One of such is that each firm makes independent decision regarding their product pricing and output based on the market and production cost. Each firm has the knowledge and ability to handle

A monopoly is a firm that has no rivals in the market. It can decide on the prices and quantity it wants. It set the prices that suit it. It aims at making profit at the expenses of consumers and at the expenses of other firms. Therefore monopolies are owned by wealthy people who are willing to do everything they can to keep their power. Some monopolies don’t mind using their networks and connections to influence politicians, decision makers, and policy makers. Monopolies are sometimes, in some countries synonym with corruption. Monopolies are willing to invest their profit in order to keep their positions and their grasp of the market. In monopolistic models, high barriers entries exist. It is not easy to enter the market. If some firms manage to enter the market, monopolies create strategies to stop them by lowering their prices so that the new firms don’t make any profit and find themselves bankrupt. Monopolies usually offer products that don’t present any close substitutes (Rittenberg & Tregarthen, 2012, 253).

In an oligopoly market, prices are stable. This is because firms within this market fear a price war occurring. When it comes to lowering or increasing price, oligopoly firms will consider the likelihood of competing firms doing the same thing, in order to avoid triggering a price war.

Within monopolistic firms there are a large number of organizations that operate within the industry which are independent from each other. The decision of one firm in the market has no significant effect on the demand curves of its rivals. There is also freedom of entry into the industry. The firms within an industry offer product differentiation, where one firm’s product is amply diverse from its competitor 's products, in order to allow raises in price without customers converting to alternate products.