Question

Find a recent article that discusses either oligopoly and/or game theory and how it relates to a real life situation (the article should be no older than 3 months) and prepare a 1-2 page summary of the article (include in text citations and References).

**2000 words minimum**

Answer 1

Oligopoly is the market competitiveness which falls in between Monopoly and Perfect Competition. As we know in monopoly, we have one firm dominating the entire market. In perfect competition, there are many firms competing for market share. In Oligopoly, the market is dominated by few large firms. For example, consider the graph below. It shows firms who sell motor fuels in UK. Top 5 firms (Tesco, BP, Shell, Esso and Sainsburys) have 67% of the overall market share.

Other examples of oligopoly are:

1. Automobile - biggest firms include Toyota, Hyundai, Ford, General Motors, VW.

2. Coffee-shop retail – Starbucks, Costa Coffee, Cafe Nero

Other key features of Oligopoly are:

1. Product differentiation is dominant

2. Prices set by one firm impact other firms

3. Barriers to entry is less than Monopoly but very high than perfect competition

Competition in Oligopoly:

1. Concept of Kinked demand curve – Oligopoly demand curve has a kink which governs elasticity of demand.

From below graph, it is clear that if a firm increase price, then the firm will lose a large share of the market. Hence, demand is elastic for any increase in price.

However, if a firm cuts its prices, then it would gain an increase in market share. But, other firms will cut prices as well because of competition and hence, the demand will increase only by a small amount. So, demand is inelastic for a price cut.

Above two points prove how rigid are prices in Oligopoly. The diagram also suggest that because of the kinked demand, decrease in marginal cost will lead to same price. Profit is maximum when MR = MC at Q.

2. Collusion – Collusion is a concept of agreeing to a common competitive price by all the firms. For example, in the graph below firms were initially agreed at Q,P as the equilibrium for market.

Now firms want to increase their profit, but since the price structure is rigid, they decide to decrease the quantity supplied to the market. So ,the new quantity is Q1. Now lesser supply will drive price to P1. So, Q1,P1 is the new equilibrium for the market.

Hence, there is an increase in the profit of firms.

For collusion to take place there has to be anti-trust legislation that prohibits the formation of these agreements. The existence of anti-trust legislation forces agreements to be informal and secret. Sometimes there is no communication between firms, but a group of firms will all sell for the same price to achieve the same effect. Firms might also deliberately avoid undercutting a competitor to achieve the same effect without making an agreement, this is called tacit collusion.

OPEC countries are a perfect example of a collusion.

Pros and Cons of Oligopoly:

Pro: Prices in an oligopoly are usually lower than in a monopoly, but higher than it would be in a competitive market.

Pro: Prices tend to remain stable because if one company lowers the price too much, then the others will do the same. The result lowers the profit margin for all the companies but is great for the consumer.

Con: Output would be less than in a competitive market and more than in a monopoly. Most competition between companies in an oligopoly is by means of research and development (or innovation), location, packaging, marketing, and the production of a product that is slightly different than the other company makes.

Con: Major barriers keep companies from joining oligopolies. The major barriers are economies of scale, access to technology, patents, and actions of the businesses in the oligopoly. Barriers can also be imposed by the government, such as limiting the number of licenses that are issued.

Con: Oligopolies develop in industries that require a large sum of money to start. Existing companies in oligopolies discourage new companies because of exclusive access to resources or patented processes, cost advantages as the result of mass production, and the cost of convincing consumers to try a new product.

Conditions That Enable Oligopolies:

The conditions that enable oligopolies to exist include high entry costs in capital expenditures, legal privilege (license to use wireless spectrum or land for railroads), and a platform that gains value with more customers (such as social media). The global tech and trade transformation has changed some of these conditions: offshore production and the rise of "mini-mills" have affected the steel industry, for example. In the office software application space, Microsoft was targeted by Google Docs, which Google funded using cash from its web search business.

Why Are Oligopolies Stable?

An interesting question is why such a group is stable. The firms need to see the benefits of collaboration over the costs of economic competition, then agree to not compete and instead agree on the benefits of co-operation. The firms have sometimes found creative ways to avoid the appearance of price-fixing, such as using phases of the moon. Price-fixing is the act of setting prices, rather than letting them be determined by the free-market forces. Another approach is for firms to follow a recognized price leader; when the leader raises prices, the others will follow.

References:

1. https://examples.yourdictionary.com/oligopoly-examples.html

2. https://opentextbc.ca/principlesofeconomics/chapter/10-2-oligopoly/

3. https://www.statista.com/statistics/312071/motor-fuel-market-share-by-brand-in-the-united-kingdom-uk/

4. https://en.wikipedia.org/wiki/Kinked_demand

5. https://energyeducation.ca/encyclopedia/Collusion

6. https://www.investopedia.com/terms/o/oligopoly.asp