Oligopolistic markets have three important characteristics. Firstly, Supply in the industry is concentrated in the hands of a few firms. The key here is to look at concentration ratios. Although it is possible for the industry to have a large number of suppliers, a high 4 or 5 firm concentration ratio of, say, 80% would suggest concentration of market power in the hands of a few large firms. Secondly, firms in the industry must be interdependent. The actions of one firm will directly affect another large firm.
With perfect competition, all firms are independent of each other. A farmer’s decision to increase the production of wheat does not affect other farmers. However, in oligopolistic markets, sale-enhancing policies of one firm have a direct effect on other firms in the industry as these extra sales come at the expense of other firms. Finally, there are barriers to entry into oligopolistic markets. These barriers are mostly in the shape of promotion in terms of branding. The major feature of oligopolistic markets is their emphasis on non-price competition.
This might take the nature of concentrating on the 4 P’s of marketing excluding price. Therefore, firms may concentrate on the best place or location, the best product or the best promotional activity. Thus, in industries where the product is more or less homogeneous or largely the same, promotional activity through branding to achieve product differentiation is carried out extensively. For example, two separate bottles of cooking oil would sparsely vary in quality or price but extensive branding and promotion geared at product differentiation would allow them to seem totally different.
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Overall pricing in oligopolistic markets is close to that of competitors with price rigidity being exhibited by firms. This is an important point. Firms in oligopolistic competition refrain from changing prices, as increases in prices would lead to loss of sales to competitors if they do not follow suit. This is facilitated with there being close substitutes. Two detergents of different companies are more or less close substitutes. Similarly, lowering prices would lead to a price war, the ultimate beneficiary being the customer while the companies suffering an enormous drop in margins.
Thus prices don’t change by much in an oligopolistic market structure speaking of the Kinked Demand Model, which basically says that the demand curve is elastic for a price rise and less elastic for a price fall leading to firms leaving prices unchanged and working on non price competition while producing where MC=MR. Similarly, oligopolistic firms may maximize their profits if they collude and restrict competition amongst themselves. Examples of oligopolistic markets includes the UK detergent industry which is dominated by Procter & Gamble & Uni Lever, both accounting for close to 90% of the total industry sales.
Coca Cola and Pepsi are also examples of oligopolistic firms with both offering largely similar drinks at more or less the same price but focusing on non-price competition through branding. OPEC is another example of a cartel and a oligopolistic market structure as it represents a majority share of the world’s oil supply. Collectively, the OPEC bloc makes decisions as to the supply of oil through member quota’s, thus influencing the price of oil, and hence each other’s economic fortunes. Works Cited Grant, Susan. Stanlakes: Introductory Economics. London: Longman, 2002.
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