Question

What is oligopoly and its characteristics? Please include a detailed description including cartels and game theories.

Answer 1

An oligopoly is a market that is dominated by a few companies. There are a few companies that offer homogeneous or differentiated goods in this market. As there are few sellers on the market, every seller also influences the actions of the other firms and other firms. Oligopoly is either perfect, or imperfect. In India, cars, cement, steel, aluminium, etc. are some examples of an oligopolistic industry.

Few firms- There are a few major companies under Oligopoly but the exact number of firms is unknown. There is also intense rivalry, as a large portion of total production is generated by each company.

Barriers to Entry- Under Oligopoly, a corporation will in the long run gain supernormal profits because there are barriers to entry such as patents, permits, control over critical raw materials, etc. Those barriers prohibit new companies from joining the industry.

Non Price Comprtition-

Out of fear of price wars in Oligopoly, corporations tend to escape market competition and therefore rely on non-price methods such as ads, after-sales services, warranties etc. This means businesses are able to influence demand and create brand awareness.

Interdependence- Under Oligopoly, where a few firms possess a large share of the industry's total production, each firm is influenced by the rival firms' price and production decisions. Therefore in an oligopoly there is a lot of interdependence between firms. Consequently, a corporation takes into account the behavior and reaction of its rival firms when deciding their price and production rates.

Collusive Oligopoly- Companies may often seek to remove confusion about operating independently and enter into price agreements with one another. This is more of a conspiracy. The conspiracy is formal or informal, regardless. It may take the form of a monopoly or leadership on rates. A cartel is an group of independent companies within the same industry that implements the same policies on demand, production, sale, maximization of income, and product distribution. Pricing is focused on conscious collusion. Under market leadership, one company is a large or dominant company and acts as the market leader that sets the price for the goods, while the other companies allow.

Oligopolistic companies form a cartel to maximize their market influence, and participants work together to collectively decide the amount of revenue each member can achieve and/or the price each member charges. By working together, the leaders of the cartel will act like a monopolist.

If there are competing firms in your market, finding out the world means guessing (or inferring) what the rivals are doing and then choosing a "best answer" It means that firms in oligopoly markets are playing a 'battle' against one another.  We need to understand how the players play games in order to understand how they would behave. That's the Game Theory function