Why Prices Often Show Less Variation Under Oligopoly Than Under Other Types of Market Structure

2036 WordsJan 18, 20099 Pages
Why prices often show less variation under oligopoly than under other types of market structure Oligopoly is a market structure, which has some distinctive qualities that separate it from the others. Most notably they are that oligopoly has barriers of entry and is made of only a few companies, which supply the majority of the market and are interdependent. In other market structures price of the product and other decisions are often based on technical information such as marginal cost or demand (when you are a monopoly) but what makes oligopoly unique from all other market structures is that companies cannot base their decisions solely on technical information they must be aware of and react to their competitors. Oligopoly is also a…show more content…
Strategies they choose might provide information about price formation in oligopolies. Lets say we have a duopoly (company A and company B), and they can sell product for either $2 or $1.80. Price / Millions in revenue |A $1.8 |A $2.0 | |B $1.8 |5 each |A 2, B 12 | |B $2.0 |A 12, B 2 |10 each | | Each company has to decide which price to set, a company can be pessimistic and use a maxi-min strategy, that is discover worst of the possible outcomes and choose the best of them, so for company A it would be $5 million if both lowered their prices and $2 million if it keeps the same, so using maxi-min strategy company should choose to lower its price. If a company is optimistic it might use a mini-max strategy, that is the worst of the best outcomes, the best outcomes for a company would be $10 million and $12 million so a company would keep its price at $2.00 and hope that its competitor would do the same. So only under oligopolies strategies are so influenced by what other companies are doing. A dominant strategy is when a company has a set of actions that thinks is the best regardless of what other firms are doing. Nash equilibrium is what a company will do if it does not have a dominant strategy; choose a best possible outcome while evaluating their competitors’ actions. So companies in oligopoly markets will try to avoid price wars, though they will still compete, just in different ways. Some

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