Question

Write (2) page paper on the market structure oligopoly. Identify an industry or market that is an oligopoly and tell us who the companies are, what products or services they provide and the percentage of their market share.

Answer 1

It shall be noted that Oligopoly is a market structure with a small number of firms selling homogeneous or differentiated products, with each firm having a significant influence on the market. These firms collude, either explicitly or tacitly, to restrict output and/or fix prices, in order to achieve above normal market returns. Firms in an oligopoly set prices, whether collectively – in a cartel – or under the leadership of one firm, rather than taking prices from the market.

The oligopoly market structure lies between the pure monopoly and monopolistic competition, where few sellers dominate the market and have control over the price of the product.

Oligopoly models:

A) Non-collusive oligopoly - Cournot Duopoly and Sweezy Model

B) Collusive Oligopoly - Cartel and Price leadership

The characteristics of oligopoly market structure are as follows:

1) There are few sellers/firms. They dominate the market and enjoys considerable control over the price of the product.

2) Since there are few sellers in the market, if any firm makes the change in the price or promotional scheme, all other firms in the industry have to comply with it, to remain in the competition. Thus, every firm remains alert to the actions of others and plan their counterattack beforehand, to escape the turmoil. Hence, there is a complete interdependence among the sellers with respect to their price-output policies.

3) Under an Oligopoly market, every firm advertises its products on a frequent basis, with the intention to reach more and more customers and increase their customer base. This is due to the advertising that makes the competition intense.

4) Any move taken by the firm will have a considerable impact on its rivals. Thus, every seller keeps an eye over its rival and be ready with the counterattack.

5) The firms can easily exit the industry whenever it wants but have to face certain barriers to entering into it. These barriers could be Government license, Patent, large firm’s economies of scale, high capital requirement, complex technology.

6) There is a lack of uniformity among the firms in terms of their size, some are big, and some are small.

7) Each firm stick to its own price to avoid a price war

Factors that give rise to Oligopoly market structure:

1) Huge capital investment

2) Economies of scale

3) Patent rights

4) Control over certain raw materials

5) Mergers and Takeovers

An industry or market that is an oligopoly

(i) Oil & Petroleum industry - Cartel is Oil & Petroleum Exporting Countries - OPEC generates approximately 44 percent of the world's total crude oil production and approximately 21 percent of the world's natural gas production.

(ii) Commercial Vehicles market - Tata Motors (68.4%), Ashok Leyland (12.9%), Volvo-Eicher (6%), Mahindra (11.2%)

(iii) Airbus and Boeing in the commercial large jet aircraft market - Airbus (45.3%) and Boeing (43%)

(iv) Intel and AMD in the CPU market - Intel (77%) and AMD (23%)