How to be a Successful Oligopolistic Firm in the Long Run

How to be a Successful Oligopolistic Firm in the Long Run

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.

The essential factor of an oligopolistic firm is interdependence. Oligopoly involves few producers, which means more than one producer as it is in pure monopoly but not so many as in monopolistic competition or pure competition where it is difficult to follow rival firms’ actions. Therefore, due to small number of producers on oligopoly market, the price and output solutions are interdependent. As a result, firms can cooperate or come to an agreement profitable for everyone. Therefore, they can increase, as it is possible, their joint profits (Pleeter & Way, 1990, p.129). Further, oligopoly is divided on pure, which is producing homogeneous products, and differentiated, producing heterogeneous products (Gallaway, 2000). Economists Farris and Happel insist that the more the product is differentiated, the more firms become independent, and the more the product differentiation, “the less likely joint profit maximization exists for the entire group” (1987, p. 263). Consequently, it is worth to be interdependent.

Another factor on the way to success on oligopoly market is understanding and using with advantage the game theory, in particular, prisoner’s dilemma. Game theory, a mathematical approach to strategic behavior, was stated by John von Neumann and Oscar Morgenstern in 1944 (Farris & Happel, 1987, p. 267). Game theory is useful in analyzing the actions in any strategic situation, from a game of chess to the pricing and output decisions of oligopoly firms where firms cooperate or conflict. The classic game is the prisoner’s dilemma:

Numbers are years in prison for each arrested player considering different behaviors of each prisoner.