Market Structure of Oligopoly

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Analyse The Structure Of The Market Structure Of Oligopoly And The Difficulty In Predicting Output And Profits

Market structure of oligopoly

Oligopoly is a market structure where there are a few firms producing all or most of the market supply of a particular good or service and whose decisions about the industry's output can affect competitors. Examples of oligopolistic structures are supermarket, banking industry and pharmaceutical industry.

The characteristics of the oligopoly are:

• Small number of large firms dominate the industry
• High degree of interdependence: the behaviour of firms are affected by what they believe other rivalry firms might do
• High barriers to entry that restrict new firms to enter the industry e.g.
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Like monopoly, if the oligopoly is maintained in the long run, it charges a high price, produces less output and fails to maximise social welfare relative to perfect competition.

Cartel is seen by the government as a means of driving up prices and profits which is against the public interest. As a result it is illegal to operate the cartel in many countries.

Tacit collusion

Tacit Collusion is collusion that is not organized through a formal, open contract between colluding parties. Tacit collusion is when firms abide to the price that has been set by a recognized leader. The leader is usually the largest firm i.e. the firm that controls the industry known as dominant firm price leadership. On the other hand, the leader may be the firm that is most reliable to follow, known as barometric firm price leader.

Dominant firm price leadership

This is when smaller firm chooses the same price as the price set by the large firms in the industry.

Source: www.bized.ac.uk/educators/he/pearson/lectures

The leader tends to maximise profits where marginal revenue is equal to marginal the marginal cost, then produces at QL and sell goods at PL on its demand curve where marginal cost equal marginal revenue. At this stage other firms in the industry will follow the price. Therefore, the market produces at Qt, with other firms producing the output not supplied by the leader i.e. Qt-Ql.

Barometric firm price leadership.

Where
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