Question

24.

Oligopoly is a common form of big business in America. Automobiles, soft drinks, fast food franchises, cigarettes, beer, and cell phone services all fall into the category of oligopoly.
a. What are the characteristics of an oligopoly? List and explain the three most important characteristics.
b. Many oligopolies are successful in earning economic profit year after year. Identify and explain what characteristic of oligopoly is most responsible for the presence of long-run economic profits.
c. Many oligopolies sell differentiated products. List and explain three ways in which the firm may attempt to differentiate its product and explain why the firm would wish to differentiate its product.

Answer 1

a) Oligopoly is a market structure characterized by the presence of a few large firms who produces homogeneous or differentiated products intensely competing against each other and recognizing interdependence in their decision-making. Under this type of market, prices are normally rigid as firms are afraid of immediate reactions of the rival firms which may start price war.

(i) A few firms: A few firms, but large in size, dominate the market for a commodity. Each firm commands a significant share of the market and it can impact market price of the product.

(ii) Barriers: There are various barriers to the entry of new firms. These barriers are almost similar to those under monoply. Entry of new firms is extremely difficult, if not impossible.

(iii) High degree of interdependence: There is a high degree of interdependence between the firms. Price and output policy of one firm is significantly impacts the price and output policy of the rival firms in the market.

b) Formation of Cartels: With a view to avoiding competition, firms may form cartel. It is a formal agreement among the firms to avoid competition. It is a situation of collusive oligopoly. This increases profit of oligopoly firm in long run.

c) Product of oligopolies is differentitated in terms of brand names, quality of product used, color of product. Examples are like car of Maruti, Tata, Fiat, Ford, etc.

Firms wish to differentitate its product so that they can impact the market price of the product.