Question

Write a paper of 300-600 words in APA format presenting your analysis of the following topic

Topic I: Discuss oligopoly, give an example, and discuss how it deals with competitive forces it faces.

dont need to be in APA format

Answer 1

The term oligopoly is derived from two word "oli" meaning few and "poly" means to sell. Hence oligopoly is a form of market structure where there are only few firms selling similar or closely differentiated products. Such a market is said to be highly concentrated. Following are the main characteristics of an oligopoly market:

1. Interdependence : Each firms decision making is dependent on the actions of its competitors.

2. Advertising: Since oligopolistic firms sell closely related products, advertising plays an important role in increasing their sales.

3. Barriers to entry: Barriers to entry restrain new firms from entering the industry. They can be due to:

• economies of scale enjoyed by a few large firms
• control over certain specialised raw materials
• patents and licences
• large unused capacity which makes it unattractive for other firms to enter.

4. Price rigidity: Each firm usually sticks to its price. If one firm tries to reduce its price, the rival firms retaliate with a higher reduction in prices. This leads to a situation of price war. On the other hand, an increase in price by one firm in order to increase profits; is not generally followed by the rival firms. Hence no one likes to reduce or increase the price. This leads to price rigidity.

5. No uniformity in market: The size of the firms considerably differs. Some are large and dominant while the others are small.

A leading example of Oligopoly can be the automobile industry of USA. The leading auto manufacturers are Ford, GMC and Chrysler.

The most general solution to the competitive forces faced by an oligopolist is Collusion. The firms join hands to set a price or output level for a market in order to maximize the overall industry profits. Sometimes, the colluding firms also act as a monopoly. Oligopolists pursuing their individual self-interest produce a greater quantity than a monopolist, but charge a lower price.