One constructive approach of categorizing market is by dividing it in terms of the number of businesses on the source side of the market and the potential buyers' focus on the demand aspect. Oligopoly symbolizes one of the market structure where there are a very few firms on the source side and an enormous concentration of purchasers on the demand side. As the clients cannot affect the marketplace conditions, they will adopt it therefore and the dealer will be active in anticipating the rival action.
Oligopoly looms large in industries of metal, petroleum, automobiles etc. Many sectors can operate geographically as oligopolies. For example banking in a small town operate as oligopoly since you will see a couple of banks in the area and the residents will be forced to take their business to the neighborhood finance institutions. ( Friedman, 1983)
Oligopoly a sophisticated market structure
Oligopoly is practically a big business. Under the forex market structure, the rivalry takes on its worst form. Product innovations, aggressive advertising and impressive marketing tactics are generally put on outweigh each other. Oligopolistic market set ups are the most challenging to analyze because they are highly interdependent and interwoven, where movements and countermoves are used rapidly. For example a simple action by Ford can lead to a reaction by Basic Motors, which cause a readjustment in Ford's plan, thus changing GM's response and so forth. So anything can happen anytime in oligopoly.
A case occurs in monopoly when all the companies attempt to promote interdependence and they all mutually consent to placed price and outcome. The businesses through their mutual coordination try to create a huge monopoly. OPEC (Firm of Petroleum Exporting Countries) is an exemplory case of a cartel system.
Price authority and Tacit Collusion
It can be an arrangement where a couple of firms make an layout of the charges for the complete firm. Other companies are forced to follow the same price style although no such contract exists on the market.
For example: In the newborn formulation industry, Abbot laboratories, Bristol Myers Squibb and American Home Products intentionally established their prices nearer to each other to dominate the industry.
The Kinked Demand Curve
This model elaborates the stickiness in rates in an oligopolistic structure. It's been hypothesized in this model that if for example, a firm X reduces its price in an oligopolistic market, the competitor will be required to lower its price to in order to avoid the loss of its market bottom part. The demand curve dd is thus the relevant curve in case there is a price lowering.
dHowever, if the company X applies to a price increase, then your case will not be the same. The competitors will not imitate this time, and would continue steadily to enjoy the customer support as they might flee the organization X products. In this case the demand curve would be DD. The firm then tries to stay in a segment of the stretchy demand curve between dd and DD. The real demand curve is symbolized by DAd, known as the kinked demand curve which silently highlights the actual fact "heads you lose, tails you lose" (Baumol and Blinder, 2009)
(Competitors prices are fixed)
(Competitors respond to price changes)
Quantity per year
Game theory and the Oligopoly
Game theory has been formulated to understand the behavior of the companies in an oligopolistic market composition that do not work on a collaborated end result and prices. The main assumption is usually that the large bossy companies are like players in a casino game of texas holdem. They make the moves of cutting down or increasing the purchase price, to market or never to advertise, to discount etc, based on their competitors' move. Understanding the payoffs can put a company in a better position to contend with its rival and become in a revenue maximizing and rational position.
C:\Documents and Configurations\Anum\Desktop\4th assignment\Understanding Oligopoly Behavior - a casino game Theory review Economics in Plain English_files\game-theory-1. jpeg
Source: Welker, J. (2009). Understanding oligopoly behavior-A game theory review. Available from: http://welkerswikinomics. com/blog/2009/12/15/understanding-oligopoly-behavior-a-game-theory-overview//
According to the above figure, both San Francisco coffee and Starbucks is following a prominent strategy. They will work up to maximize their outcome through advertising, ignoring what their competition does. If S. F advertises, Starbucks makes income ($12 vs. $10) through advertising. This means the "pay offs" are the same. Since both companies are enjoying revenue through advertising they'll do so, although total revenue are less in the event when both are advertising, as compared to when they aren't advertising. But such a condition will be a condition of instability, concerning advertise may very well be good for both. So we say that advertise/advertise is Nash equilibrium, as at this time none of the organization will change its strategy since it is getting incentives to both (Jason Welker, 2009).
Market failure due to Oligopoly
Keeping because the above theories that try to explain oligopolistic behavior, the market inability due to oligopoly can be related to various causes. Inefficiency, instability and indeterminacy as a result of oligopoly may result in market crash. The firm's supremacy is made as the capability is established increasingly more, but little is produced in order to create manufactured barrier to admittance. The competitors remain competitive on the basis of non charges factors such as heavy advertising, which gives more hold up to the man-made barrier to access. Prices are well above cost and price discrimination prevails. Some of the firms also engage in self-regulation to maintain their own gains and market share that further detoriate the situation (Grewal and Kumnick, 2006). Oligopolistic businesses output and prices considerably differ from what's socially accepted from them. It is also thought that the deceptive advertisement by the large organizations also deludes the consumers and compels these to buy products that they don't want. They impose political and economic vitality and hover over the mind of the consumers working as an invisible side.
Number of businesses in the market
Frequency in Reality
Public Interest Results
Long Run Profit
Produces Large show of GDP
Source: Economics: Principles and Policy By William J. Baumol, Alan S. Blinder
MC=MR is applicable for a profit maximizing company, under equilibrium. However, in oligopoly, MC is usually unequal to MR mainly because in oligopoly the firms are seeking to look at strategies relative to the game theory, or they look for techniques such as increasing sales for revenue maximization as their ultimate goal.
In a properly competitive market place the patterns of the businesses automatically lead to a maximization of consumer benefits through an reliable allocation of resources. In oligopoly however, learning resource allocation is usually is not well arranged, more focused is paid on restricting result in an attempt to maneuver prices and revenue. In an oligopoly everything is possible, can occur anytime anywhere, so the economists remain unable to plainly predict its behavior. Besides, its ability to lead the market down, some economists are of the fact that oligopoly has made a significant contribution for the economic growth before two decades leading to a rise in the average income of the rich countries. (Baumol and Blinder, 2009).
What will be the implications for management of businesses in such constructions?
Oligopoly is market characterized by a few organizations. Managers of a company in that composition know that their company enjoys market power. However the other players have their talk about of electric power too. In case the managers take the right plan of action, properly examining the behavior of their rivals on the market, they will probably make a profit.
Strategic behavior identifies the firm's capability of proper awareness of the market electric power and awareness of their rival's move. Strategic action occurs in oligopolistic set ups where there is less product differentiation and a competitive industry is present (Taylor and Weerapana, 2009)
Implication for the managers
The most important implication for the professionals regarding oligopoly is the pricing practice based on mutual interdependence. In case there is monopoly, the absence of competition enables the managers to follow the MR=MC role to maximize its profit. However in Oligopoly, simply following a MR=MC isn't just enough.
Consider, including the circumstance of Proctor and Gamble, where the director hires a consultant for the comprehensive analysis of the cost, structure and demand. After an in depth evaluation of the framework of the body soap products, the director uses the MC=MR rule and place the retail price at $1. 99. In an abrupt move, the rivals Colgate-Palmolive, Lever brothers etc set the price of the similar product 10 to 15 below compared to that of proctor and gamble. What the manager is likely to do? Either they can go for advertising and heavy advertising to compete keenly against the lower prices of the rivals or can lower its prices down. Or he is able to simple do little or nothing if he is self-confident enough of the strong devotion that his brand likes among consumers. The point is that, that rates in oligopolistic structure can't be done without taking into account your competitor. This is the essence of common interdependence (Young and McAuley, 1994)
The second implication for the managers is to comprehend that it could be extremely difficult to make money in a competitive market. Companies must be all the cost efficient as you possibly can because they can not control the prices.
The managers are said to be vigilant enough to be able to identify opportunities and enter into the market before the others could enter. They should be in a position to make their place before the demand gets high enough to aid an above normal price.
A situation could happen in oligopoly, where in fact the managers in a firm become so successful in beating up the competition that the firm becomes a monopoly, or the one which can exercise monopolistic electric power. Such an instance took place with IBM when In 1969, the organization dominated the computer market so much so, that the team of Justice were required to issue an antitrust suit against it (Keat, Young and Benerjee, 2009)
Global implication for managers
The managers should keep in mind that the process of benchmarking within an oligopolistic composition strategy formulation should be done keeping because both domestic as well as the global challengers.
For example AT & T marketing communications not only got into account Northern telecom but also Siemens, Ericsson and NEC and Fujitsu.
Many of the organizations that refuse to take concern from the international firms will probably face repercussions. Like many American companies got a significant blow using their Japanese competitors before twenty years. Companies like IBM and Caterpillar likes success because they proven a strong keep in the Japanese market well before time.
The oligopolistic structure also highlighted the value of alliance for the professionals. Alliances permit the firm to obtain technology from the rival firm. Whilst the acquisition of the technology can be a source of gain for the organization, the firm giving up the technology can face causalities ( Yoffie, 1993)
The managers associated with an oligopolistic market structure have to take into consideration several aspects in their decision making. The professionals are plunged into sophisticated charges decision. They take into consideration the three C's of Cost, customers and competition in their decision making. Price wars were common within an oligopolistic market, but they are becoming less consistent with the duration of time, mainly due to the realization of the managers. Managers have comprehended, through their bitter encounters, that the price wars are costly, nor bring any benefits. They thought we would compete on the advertising and on product variations. So they may have chosen not to contend on prices and also have found for themselves a journey of mutual gain.
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