Main economic features of an oligopoly

Published: 2020-05-26 10:16:04
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This essay aims to place chief economic characteristics of an oligopoly. An oligopoly is a market construction where few houses portion a big proportion of industry among them.
Features of oligopoly
There are few features of oligopoly that distinguishes it from other market constructions.
The houses under oligopoly may bring forth indistinguishable merchandises ( e.g. metals, gasoline, sugar ) or differentiated merchandises ( cocoa saloon, vino, autos ) . Few Firms portion big part of industry Significant entry barrier: It can be in signifier of authorities license, High MES of industry etc,
Mutuality of the houses:
Market monetary value stableness
Industry Concentration
Harmonizing to Peter city manager ( 1991 ) , degree to which end product of the industry is concentrated in a few custodies is industry concentration, Industry concentration can be measured by utilizing concentration ratio and Herfindahl-Hirschman Index ( HHI ) .As per Paul ( 1986 ) a concentration ratio measures the per centum of an industry end product produced by largest n houses, it is summing up of per centum of market portion of single house. The concentration ration is expressed as CRn
Mathematically concentration ration can be expressed as
CRnA =A A X1A A +A A X2A A +A A X3A A +A A … A … A +A A Xn
where Xi= market portion per centum of ith house
Another step of industry concentration is HHI, the herfindahi index is defined as the amount of the squared market portion of all the houses ” ( paul pg 536 )
HHIA A =A A X12A A +A A X22A A +A A X32A A +A A … A … A +A A Xn2
where Xi = market portion of the ith house.
Cooperation or competition
Firms under oligopoly are strategically mutualist. Game theory helps to understand strategic mutuality of houses for market determinations. Game theory seeks to understand whether strategic interaction will take to competition or co-operation among challengers ” ( David Begg, pg131 ) . Harmonizing to John Sloman ( 2001 ) houses may wish to collaborate for net income maximization or they may be tempted and seek to vie with the challengers to derive bigger portion of industry net income each scenario has different net income out comes ( pay-off ) .Which scenario is optimum for house can be explained with the aid of Nash equilibrium. Nash equilibrium occurs when each participant does what is best for themselves, given what their challengers may make in response ” ( Begg and ward, pg 137 )
Firm A
Firm B
Price war
Taking illustration of two houses A and B,
We will seek to understand pay-off matrix.
Each house has two options: cooperate or monetary value war, value on left is pay off to house B
And value on right is ever pay off to tauten A. While taking determination house A analyse the base of house B which can be either collaborate or competition. Let us presume that house B decided to collaborate. If house A cooperates, both houses will Source: Begg and ward
earn ?50 million, but if A starts monetary value war, so it will gain ?60 million. Now if B chose to get down monetary value war but A choose to collaborate so A will gain ?20 million and if besides choose to get down monetary value war both houses will gain ?30 million. Looking at illustration it seems that if both houses coordinate single house and industry net income will be maximised, but still both will take monetary value war as per Nash equilibrium both houses find optimum solution in monetary value war taking into account their challengers determination.
Monetary value repair
When houses under oligopoly decide to hold on monetary values, end product and markets etc this scenario is called collusion. Collusion reduces the fright of monetary value war, competition for market incursion of rival and alteration of end product to fit maximal efficiency degree ( MEA ) . Collusion is farther defined as formal collusion and silent collusion. A formal collusion is formal understanding among the houses under oligopoly about monetary value and market portion. A formal collusion is besides called as trust. As per John Sloman ( 2001 ) trust will maximize industry net income if members of trust act as a individual house. This state of affairs will make market status similar to monopoly
Graph trust.
Tacit collusion is another signifier of collusion where houses follow the monetary value set by market leader.
Harmonizing to Peter ( 1991 ) monetary value rise enterprise can be taken by largest house in the industry to which other houses follow and raise their monetary values this scenario is known as dominant steadfast monetary value leading. Similarly monetary value rise enterprise can be taken by house which is non market leader but asses the alteration in demand and cost status whereas all other houses in the industry will follow. The house which took monetary value enterprise is called barometric house hence it is called barometric house monetary value leading.
Non conniving oligopoly: Competition among rival
Firms under non conniving oligopoly does non collaborate with challengers for monetary value repairing but they compete with challengers to break monetary value to derive market portion but still monetary values instead remains stable. This scenario is explained by Kinked demand curve theory.
Harmonizing to toilet sloman ( 1991 ) The theory is based on premises that if oligopolist cuts its monetary value, challengers will besides cut their monetary values to forestall loss of market portion. But if oligopolist addition its monetary value, challengers will non increase their monetary value so that challengers can increase their market portion. The demand curve for each oligopolist house will be kinked. As the steadfast addition its monetary value clients will exchange to moo priced merchandises hence demand is elastic. On the other manus if oligopolist house cut down its monetary value, challengers

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