Firms' Incentives to Avoid Price Competition in Oligopoly Markets

531 Words2 Pages
bulb-icon

Recommended: Pricing concepts and strategies

Firms' Incentives to Avoid Price Competition in Oligopoly Markets

In the UK a few, large firms dominate most industries. These

industries are known as oligopoly markets. Oligopoly markets are an

example of imperfect competition. It consists of a market structure in

which there is a small number of large firms in the industry hence is

relatively highly concentrated. Barriers to entry and exit are also

likely to exist. In oligopoly markets there is product

differentiation, the extent of which depends on the type of product

produced. This leads to interdependency, as the actions of one large

firm will directly affect another large firm. Therefore, firms are

said to be operating under conditions of uncertainty because firms are

unable to judge the future actions of their competitors and hence

their own firm's future.

For example, if an oligopolist firm raises its prices, it could risk

loosing market share if its competitors do not follow which would lead

to lower profits for that firm. If the firm was to reduce prices, it

...

Show More
Related

  • Comcast Price Discrimination

    1965 Words  | 4 Pages

    Firms may be categorized in a variety of different market structures. Perfectly competitive, monopolistically competitive, oligopolistic,

    Read More

  • Australian Airline Oligopoly

    2191 Words  | 5 Pages

    An oligopoly is defined as "a market structure in which only a few sellers offer similar or identical products" (Gans, King and Mankiw 1999, pp.-334). Since there are only a few sellers, the actions of any one firm in an oligopolistic market can have a large impact on the profits of all the other firms. Due to this, all the firms in an oligopolistic market are interdependent on one another. This relationship between the few sellers is what differentiates oligopolies from perfect competition and monopolies. Although firms in oligopolies have competitors, they do not face so much competition that they are price takers (as in perfect competition). Hence, they retain substantial control over the price they charge for their goods (characteristic of monopolies).

    Read More

  • Environmental Analysis Of Lockheed Martin

    1642 Words  | 4 Pages

    This organization belongs to the oligopoly market structure. The oligopoly market structure involves a few sellers of a standardized or differentiated product, a homogenous oligopoly or a differentiated oligopoly (McConnell, 2004, p. 467). In an oligopolistic market each firm is affected by the decisions of the other firms in the industry in determining their price and output (McConnell, 2005, P.413). Another factor of an oligopolistic market is the conditions of entry. In an oligopoly, there are significant barriers to entry into the market. These barriers exist because in these industries, three or four firms may have sufficient sales to achieve economies of scale, making the smaller firms would not be able to survive against the larger companies that control the industry (McConnell, 2005, p.

    Read More

  • Monopolies: Beneficial or Detrimental to the Economy?

    1819 Words  | 4 Pages

    Others added that monopolies produce less output and charge a higher price than a purely competitive environment. The monopolist sets the marginal revenue equal to marginal cost and output is therefore smaller. In monopolies, profits can persist indefinitely, because high barriers to entry prevent new firms from taking part in the

    Read More

  • How to be a Successful Oligopolistic Firm in the Long Run

    1726 Words  | 4 Pages

    It is a well-known fact that every firm wants to be successful in its business. Sometimes it is difficult to decide what kind of actions to take in order to achieve it. Especially, it is hard on oligopoly market because this is one of the most complicated market structures. Oligopoly includes many models and theories such as duopoly where are just two producers and which pricing decisions remind monopoly, kinked demand curve, which decreases economic profit, and cartel, which brings economic profit just for the short-run. However, to be a successful oligopolistic firm in the long run, managers should include in the planning process such economic theories and models as producer interdependence, the prisoner’s dilemma, price leadership, nonprice adjustments, and correct using of barriers to entry.

    Read More

  • Pure Competition

    568 Words  | 2 Pages

    There are many industries. Economist group them into four market models: 1) pure competition which involves a very large number of firms producing a standardized producer. New firms may enter very easily. 2) Pure monopoly is a market structure in which one firm is the sole seller a product or service like a local electric company. Entry of additional firms is blocked so that one firm is the industry. 3)Monopolistic competition is characterized by a relatively large number of sellers producing differentiated product. 4)Oligopoly involves only a few sellers; this “fewness” means that each firm is affected by the decisions of rival and must take these decisions into account in determining its own price and output. Pure competition assumes that firms and resources are mobile among different kinds of industries.

    Read More

  • Single Price Monopoly Case Study

    1005 Words  | 3 Pages

    Question: “A single-price monopoly will always charge a price that is on the elastic range of the demand for the monopoly’s output.” Discuss using relevant diagrams or algebra.”

    Read More

  • What Is The Cause Of The Black Death

    231 Words  | 1 Pages

    Black Death took the life of seventy to two- hundred million people throughout Eurasia and Europe in the years 1346-1353. The Black Death was Yersinia pestis causing bubonic plague. It originated in Central Asia, traveling reaching Crimea, Mediterranean, and Europe. It was spread by oriental rat fleas that lived on black rats. The black death started off as a cold. I personally think people thought Black Death was a sign from God, himself. They thought this was God’s punishment for sinning and not repenting.When the Black Death arose it caused people to abandon their families after black death swept Europe people started practicing religious. When it occurred it starts off as a chill, then comes the extreme pain, next to the depression. The

    Read More

  • Difference Between Oligopoly and Monopolistic Competition

    378 Words  | 1 Pages

    In the short run, oligopolies are. able to earn abnormal profits, but in the long run as well they are. able to sustain abnormal profits due to the barriers to entry and exit. Then the s The barriers act as a strong deterrent to firms that want to come in. the industry and " eat into" the abnormal profits and then exit the market.

    Read More

  • The Effects of Advertising on Profits

    1120 Words  | 3 Pages

    The. An oligopoly is a market structure characterised by few firms and many buyers, homogenous or differentiated products and also difficult market entry (Pass et al. 2000) an example of an oligopoly would be the fast food industry where there is a few firms such as McDonalds, Burger King and KFC that all compete for a greater market share. In a Monopoly, there is one firm that controls the market, and there are no similar products being sold by other companies. Advertising is therefore used to encourage people to buy more of their product. In a monopoly there is a downward sloping demand curve, the reason for this is that a firm must lower the price to sell an extra unit of their product.

    Read More

  • Compare And Contrast The Four Market Structures

    1100 Words  | 3 Pages

    The second market structure is a monopolistic competition. The conditions of this market are similar as for perfect competition except the product is not homogenous it is differentiated; thus having control over its price. (Nellis and Parker, 1997). There are many firms and freedom of entry into the industry, firms are price makers and are faced with a downward sloping demand curve as well as profit maximizers. Examples include; restaurant businesses, hotels and pubs, specialist retailing (builders) and consumer services (Sloman, 2013).

    Read More

  • The Impact Of Monopolies

    783 Words  | 2 Pages

    Monopolies have a tendency to be bad for the economy. Granted, there are some that are a necessity of life such as natural and legal monopolies. However, the article I have chosen to review is “America’s Monopolies are Holding Back the Economy (Lynn, 2017)” and the name speaks for itself.

    Read More

  • Alternative Theories To Profit Maximization

    1736 Words  | 4 Pages

    Markets have four different structures which need different "attitudes" from the suppliers in order to enter, compete and effectively gain share in the market. When competing, one can be in a perfect competition, in a monopolistic competition an oligopoly or a monopoly [1]. Each of these structures ensures different situations in regards to competition from a perfect competition where firms compete all being equal in terms of threats and opportunities, in terms of the homogeneity of the products sold, ensuring that every competitor has the same chance to get a share of the market, to the other end of the scale where we have monopolies whereby one company alone dominates the whole market not allowing any other company to enter the market selling the product (or service) at its price.

    Read More

  • Advantages And Disadvantages Of Perfect Competition

    743 Words  | 2 Pages

    An oligopolistic market has a small number of sellers dominating market share and therefore barriers to entry are high. These sellers are highly competitive and do not act independently of each other. Access to information is limited so sellers can only speculate of their competitor’s actions. Sellers will take advantage of competitor’s price changes in order to increase market share.

    Read More

  • The Theory of Price Discrimination

    724 Words  | 2 Pages

    The modern theory of price discrimination began with the work of Arthur Cecil Pigou (1877- 1959) and is defined by Machlup (1955): "Price discrimination may be defined as the practice of a firm or group of firms of selling (leasing) at prices disproportionate to the marginal costs of the products sold (leased) or of buying (hiring) at prices disproportionate to the marginal productivities of the factors bought (hired)". But in simpler terms, "price discrimination is often defined as charging different customers different prices for the same or highly similar offering" (Smith, 2004). The motive behind this is to increase profit by reducing consumer surplus. If the same price is charged to all consumers, some potential revenue is lost since some of the consumers would have been prepared to pay more. But before answering the question of whether firms should price discriminate or not, we will have to distinguish between the various types of price discrimination and before that it is important to note that there are three necessary conditions for a firm to practise price discrimination, namely, the firm must be a price maker, the elasticity of demand must be different in the different markets and finally, the market must be clearly separated.

    Read More

More about Firms' Incentives to Avoid Price Competition in Oligopoly Markets

Open Document