In: Economics
please select an industry in which oligopoly exists. Present the reason(s) why you believe an oligopoly exists in this industry. Next try to imagine how one of the firms in this industry (name any of the major firms in the industry) may be operating as a typical oligopolist. While your answer will be speculative, explain why the behavior you describe would be consistent with the chapter description of how an oligopolist would act.
Oligopoly consists of a few companies having greater influence over an industry. They cooperate with each other in order to reap the benefits even though they are considered as competitors with in the specific market. One of the common industry in which oligopoly exists is the automobile industry . The US automobile industry consists of three major firms, General Motors, Ford and Chrysler.
Reasons for the existence of oligopoly in automobile industry are
1. Requires large investment of capital.
In an industry where the addition to output may likely depress prices, no entrepreneurs will like to venture to invest large sums. Further, they also fear of provoking a price war by the established firms. It is difficult to make a new product in the midst of differentiated products.
2. Economies of scale
Very few firms will survive in those industries where there is a lot of mechanisation and requirement of large scale economy. Only a few firms can satisfy the entire demand.
3. Barriers to entry
It is difficult to enter in to an automobile industry because of the requirement of large amount of capital. This is also combined with the difficulty of marketing new products in the presence of already established brands. They may be afraid of the price war as well.
A vivid dynamic relationship between price leaders and price followers can be found in the automobile industry. Let General Motors be the price leader. Now Chrysler announce the price increase after that the General Motors announced the price increase which was smaller than Chrysler 's . General Motors move then will lead to Chrysler to reduce its own price
When it comes to the pricing decisions oligopolists acts like a single monopolist. They want to maximise the joint profit instead of firm's single profit. Thay set the collusive price.