Question

On pages 432-3, at the conclusion of the chapter on oligopoly, Krugman acknowledges that oligopoly is far more common than the other basic market structures, competition and monopoly. However, he makes the case that perfect competition should still be used to represent oligopolized markets. Please indicate if you agree with this assessment or not, but back up your conclusion--it's a legimiately debatable point.

Answer 1

An Oligopoly represents as market structure consisting of two or more firms, usually small number of larger firms which limits the competition in the market structure and thus causes higher prices to the consumers in the market. In this type of market all the firms would have a significant influence on the other. Apart from the higher pricing, the consumers in this type of a market have to face issues like slow innovations, absence of new entrants in the market etc. In an oligopoly market, the prices are fixed not by the market forces, but through the collusion of the available firms in the market which would result in better profit margins for the firm when compared to competitive markets. Here, most of the firms are seen to agree to cooperate and thus attain the benefit sharing which could result in lowering the competition levels with time.

                                    A perfectly competitive market represents and idealistic condition of a market and has the following features

· All the firms are the price takers and sells identical products

· The prices of the commodities are not based on the markets ie; market has no influence on the pricing of the commodities.

· There will be no entry and exit costs for the firms in these markets

                                           With reference to the above definitions of oligopoly and perfectly competitive markets the following could be analysed along with Krugman’s statement that a perfect competition should be used to represent an oligopoly

· In both oligopoly and perfectly competitive markets, the prices of the goods are not determined by the market forces

· Although identical products are not sold, an oligopoly market assumes the firms to be price determinants, which is not similar to a perfect competition

· Prices would be usually higher in an oligopoly compared to a perfectly competitive market

· Oligopolies will be having inelastic demands whereas a perfect competition would have elastic demands

                                                  From the above comparison, we can see that there are of differences between an oligopoly market and a perfectly competitive market. The only similarity that could be found is about the price determination mechanism. Thus, on analysis it can be found that a perfect competition could not be applied to an oligopoly market and thus Krugman’s finding cannot be justified.