Question

Oligopoly is the market structure of big business in America. Develop and discuss with examples (choose an oligopoly industry to focus on here) where appropriate the various aspects that make up Michael Porter's structural analysis of an oligopoly for your selected industry.

Answer 1

Oligopoly is the type of market structure where a few sellers own major share in market and hence are able to influence the prices and output in the market. They sometimes form cartel to control the prices.

Eg: telecommunication in USA. It has a few large firms that own a major share in market like Verizon, AT&T etc.

The airlines industry in USA also has oligopoly.

Michael porters five forces of analysis and their relevance to the telecom industry is shown below

1) Entry of competition: The entry in such business require huge investment in infrastructure and huge costs. So this acts as the barrier to entry In such oligopoly industry. The entry of competition is low because of the above said reason in telecom as well. It would require to set up stores, call centres etc which would be a costly affair and hence the competition is low.

2) Threat of substitutes: There is low or moderate threat of substitutes. The telecom could have substitutes like emailing or instant messaging etc. Hence the threat is less in this industry.

3) Bargaining power of buyers: Buyers would have low bargaining power because the number of firms are less in number and each of them have huge share.

Also in telecom, the cost of switching to another company is less. Since they all the providing similar services, they have similar rates, so the buyer is not benefitted from switching.

4) Bargaining power of suppliers: suppliers are usually between 2-10. In telecom, there are 3-4 major players like Verizon etc ,so they have more control over market.

The product differentiation is also less because they are selling almost the same services. But this leads to higher competition which forces sellers to resort to non price and price competition like freebies, unlimited minutes, better network etc.

5) Rivalry among existing companies: since the sellers are few, they compete to gain maximum share. This as stated above would mean non price competition with advertising, other bundling of services etc.

Also in order to avoid competition, they can collude to form cartel and act as monopoly to reduce competition.

(You can comment for doubts)