As the entry in oligopolistic markets is difficult, above normal profits are possible only in the long run. Before publishing your Essay on this site, please read the following pages: 1. Simply add the required resources to your cart, checkout using the usual options and your resources will be available to access immediately via your. By mutually setting up prices at reasonably higher level, it could be possible to ensure higher level of growth and success of the firm. Most of them probably taste slightly different, but at the end of the day, they are all breakfast cereals. There does not have to be a formal agreement for collusion to take place although for the act to be illegal there must be a real communication between companies - for example, in some industries, there may be an acknowledged market leader which informally sets prices to which other producers respond, known as price leadership.
There are various competitors in this market but the dominant ones include General Motors, Honda, Chrysler, Toyota and Ford. The firms with lower market shares may simply follow the pricing changes prompted by the dominant firms. It is because the number of sellers is not very large and each seller controls a big portion of total supply. In its share of the market, it controls the price and output. In addition to above all factor, the existing firms would not allow a new firm to set in the industry. In an oligopolistic market, a firm has to rely on other firms for taking decisions regarding prices because the slightest change in the price of rivals may cause loss to the firm.
Nature of product: If the firms product homogeneous product, it becomes pure oligopoly. On the other hand, in oligopoly, a slight competition is there among the firms. No firm can predict the consequence of its price-output policy. Oligopoly is said to prevail when there are few firms or sellers in the market producing and selling a product. In a perfectly competitive market, entry and exit are assumed to be costless. Firms often collude in an attempt to stabilize unstable markets, so as to reduce the risks inherent in these markets for investment and product. This leaves all of them with a significant amount of market power.
Further, each firm wants to keep its own decision to be as unpredictable as possible to rivals. Cartel: A cartel is when a group of firms decide to agree on leveling out the output. Since there is no other competitor to fear from, the sellers will use their status of dominance and maximize their profits. Sources of Power Market making ability by virtue of being virtually the only viable seller in the industry. Deliberate attempts for monopolistic markets would include collusion, lobbying governmental authorities etc. Large number of consumers: In this market, there are large numbers of consumers to demand the product. Ability to set price: Oligopolies are price setters rather than price takers.
This main feature of oligopoly is called interdependence. Due to economies of scale. Oligopolistic firms may employ restrictive trade practices to increase prices and control production. This increases the potential consumer surplus that a business might extract. Under perfect competition advertising is unnecessary while a monopolist may find some advertising to be profitable when his product is new or when there exist a large number of potential consumers who have never tried his product earlier. Without the benefits of this status, firms would not be able to realize returns on their investments, and potentially beneficial research would be stifled.
Apart from the above reason, there could be other major reasons for which the firms choose not to compete on price. An oligopoly is a market dominated by a few large suppliers. Advertising is an important and a powerful marketing weapon under oligopoly. However, it is essential for an oligopolistic firm to invest heavily in advertising and marketing for surviving the competition. Price War: Oligopoly firms are always engaged in a price war.
Six main features of oligopoly 1. In this way, the oligopoly market situation can be compared to a game of cards, where a player does not know in advance the cards the other players hold and conceals his own cards from others. For more information, I suggest you visit the link given below. This policy change on the part of the firm will have obvious and immediate effect on its competitors. But the situation under oligopoly is quite different because of interdependence of the firms in it.
Under oligopoly with product differentiation each firm controls a large part of the market by producing differentiated product. A change by any one firm say, Tata in any of its vehicle say, Indica will induce other firms say, Maruti, Hyundai, etc. These make entry costly and exit not costless. This is precisely why an oligopolistic market is subject to greater risk of connivances. Instead of independent price and output strategy, oligopoly firms prefer group decisions that will protect the interest of all the firms. Any move taken by the firm will have a considerable impact on its rivals.