Monopoly and Oligopoly Essay

Monopoly and Oligopoly Essay The Main characteristics of an oligopoly are that the supply of a product or products is concentrated in the hands of a few large suppliers, there could be thousands of small suppliers but the market is mainly dominated by around 4 or 5 large firms. For example firms Tesco, Asda, Sainburys and Morrisons, these are the 4 main supermarkets in the UK but there are thousands of small corner shops who provide some of the same goods the supermarkets do. Another characteristics of an oligopoly is interdependence, this is when the actions of one large firm will directly affect another large firm of the same market.

For example during the Christmas period Tesco lowered the price on certain alcoholic drinks to pull customer in to the stores to buy their Christmas food shopping, Asda then followed suit and did the exact same thing with the same products. On the other hand if firms raised their prices the other firm are very unlikely to copy, the other firm are more likely to advertise the fact they are now cheaper in the hope of gaining a bigger share of the market. However there is a tendency for firms to collude and agree to raise prices together, this maintains their abnormal profits and ensure no one loses.

This behaviour is illegal in the UK and the EU and firm’s caught doing this will be heavily fined. {draw:frame} Oligopoly’s are a few firm dominating a market,a monopoly is a single firm dominating a market or being a sole supplier of a market, this is called a pure monopoly. An example of a pure monopoly would be Scottish water; they are the sole provider to every household in Scotland of running water. {draw:frame} {draw:frame} For any firm profit is a must for a business to survive, firms will look in to other parts of a market to gain potential profits.

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For a firm to move into a particular sector of a market there would have to be good roles of profit. A firm would have to get a good return on their investment, the higher the risk and longer a firmhas to wait to earn a potential return on their capital, the greater the minimum required return on their investment they will demand. For a firm to move in to a particular sector,firms would also have to consider if this would attract new investors. If the firm was going to make a quick return on its investment this would attract more investors as they would gain higher amount of dividends on their investment.

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