Economics Today (19th Edition)
Economics Today (19th Edition)
19th Edition
ISBN: 9780134478777
Author: Roger LeRoy Miller
Publisher: PEARSON
Question
Book Icon
Chapter 26, Problem 26.1LO
To determine

Key characteristics of Oligopoly market.

Expert Solution & Answer
Check Mark

Explanation of Solution

Key characteristics of a Oligopoly Market

  • Few firms: There are a few firms in an oligopoly market. Oligopoly industry is dominated by a few large firms. The market share of these few firms is relatively large as compared to the market size. Thus these few firms have a substantial control over the market.
  • High Barrier of entry or exit: It is not easy for any firm to enter or exit this industry. The barrier of entry or exit is high. Barriers are created in forms of patents and copyrights, government restrictions or huge start up costs. Because of high barriers, firms cannot easily enter or exit the market. Thus the existing firms have a huge control on the market.
  • Interdependence: The firms are highly interdependent. One firm’s decisions depends on another firm. As a group of firms have a substantial share of the market, so the decision of each firm have an impact on the rival firm. It provokes a countermove from the rival.
  • Differentiated Product: The firms sell differentiated products which are similar to each other but not identical. They are not perfect substitutes. Each product is slightly different from each other. This is known as product differentiation. Each firm in monopolistic markets claims their product to be exclusive from the other. This gives them slight monopoly power and so they have a negatively sloped demand curve. Products are generally differentiated based on three categories.
  • Physical differences.
  • Perceived differences.
  • Differences in supports services.
  • Advertisement: It is a big instrument in the hand of an oligopoly firm. They use it as a tool against the rival firm. An oligopoly firm under oligopoly does aggressive advertising with the objective of taking into custody a large part of the market.
  • Group Behavior: They may have a formal or informal group of firms. They have one firm as the leader firm and others as the followers. They form the group by a formal agreement between the groups of producers, to control the price of the product. The goal of the group is to maximize collective profit.
  • Price Rigidity: Oligopoly firms have to stick to their own price. If one firm tries to reduce their price, the rival firm may respond by an even higher reduction in the price level. On the other hand, if a firm tries to increase its price, the rival firm may not respond to it at all.
  • Kinky demand curve: Because of the stickiness of the price, the oligopolists are faced with kinked demand curve. Actually the oligopoly firm faces two demand curves. A relatively inelastic demand curve for low prices and a relatively elastic demand curve for the high prices. So the demand curve for the firm will have a kink at the intersection point of the two curves. If the firm tries to increase the price above the equilibrium level, the other firms will not follow. So the firm will face an elastic demand curve. When the price is reduced below equilibrium level, other firms will follow and thus faces a relatively inelastic demand curve.
Economics Concept Introduction

Introduction:

Oligopoly Market: An oligopoly market structure is a market where a few firms sell similar but differentiated products. But the special feature is that only a few firms hold the major market share. Oligopoly market is said to be highly concentrated. They dominate the pricing strategy. They are the market leaders. Others are the followers.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Knowledge Booster
Background pattern image
Recommended textbooks for you
Text book image
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:9780190931919
Author:NEWNAN
Publisher:Oxford University Press
Text book image
Principles of Economics (12th Edition)
Economics
ISBN:9780134078779
Author:Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:PEARSON
Text book image
Engineering Economy (17th Edition)
Economics
ISBN:9780134870069
Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:PEARSON
Text book image
Principles of Economics (MindTap Course List)
Economics
ISBN:9781305585126
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Text book image
Managerial Economics: A Problem Solving Approach
Economics
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Cengage Learning
Text book image
Managerial Economics & Business Strategy (Mcgraw-...
Economics
ISBN:9781259290619
Author:Michael Baye, Jeff Prince
Publisher:McGraw-Hill Education