Question

a) What is meant by mutual interdependence in oligopoly markets? Explain why oligopoly firms are unlikely to engage in price competition.

b) Discuss one advantage and one disadvantage of a monopolistic market structure compared to a perfectly competitive market structure.

Answer 1

a. Many retail-level transactions made by individuals are generated in markets that are neither ideally competitive, monopolized, nor monopolitically competitive. Instead they're oligopolies. Oligopoly occurs when all or most of the profits of an market are owned by a small number of big corporations. Oligopoly cases exist and include the car industry, cable television and commercial air travel. Oligopolistic companies in a bag are like animals. They can either scratch each other to pieces, or they can cuddle up and make themselves comfortable. Oligopolies are usually characterized by mutual interdependence where different decisions, such as production , price, ads, and so on, depend on other firm 's decisions. Analyzing oligopolistic firms' choices about pricing and quantity produced involves taking into account the pros and cons of competition versus collusion at a given point in time.

Generally, oligopolies are defined by mutual interdependence where different decisions, such as output, price, advertising, and so on, depend on the decisions of other firms. Analyzing the choices made by oligopolistic firms about pricing and quantity generated requires taking into account the pros and cons of competition versus collusion at a given time point. In formal collusion, cartels tend to set prices based on the MC and MR of the company. They collectively agree on prices and production, and assign pricing to various firms. For instance, OPEC practices such structured collusion. Since each business has a fixed price and production, there is no market rivalry and they prefer to participate in non-price competition.

b. Advantages are:

Research and development are ongoing. Monopolies may make supernormal profit which can be used to finance spending on high-cost capital investment. Successful research can be put to long-term use for improved products and lower costs. This is important for such industries as telecommunications, manufacturing aeroplanes and pharmaceuticals. There could be less production of prescription drugs without the monopoly control that a patent provides. There is a high risk of failure in the production of drugs; monopoly profits offer a firm more trust to take chances, and finance work that may be futile.

Scale economies Increased output will result in reduced average production costs. This can be transferred in the form of lower prices onto customers. See: Scale economies This is critical for high fixed cost industries, such as tap water and steel production.

Disadvantages are:

Higher prices than in competitive markets – monopolies are met with inelastic demand, and so prices will increase – giving customers no alternative. Microsoft, for example, had a monopoly on Computer software in the 1980s, and paid a high price for Microsoft Office.

Decline in consumer surplus- Items pay higher rates and can afford to buy less items. This often leads to allocative inefficiency, as the price exceeds the marginal cost.