Main Economic Features of Oligopolies and Price-fixing Theories

Introduction

Oligopoly, from the ancient Greek όλίγοι "a few" and πώλης "seller" (Woodhouse, 2002), defines the market with a small number of large players. (Begg and Ward, 2009, B&W). To demonstrate a clear understanding of what it is and how it works, this essay will be tacitly divided in two sections. In the first section I will discuss oligopoly's definition, demand curve, main features and price-fixing. In the second, I will illustrate oligopoly by referencing the UK Beer Market, and the extent to which this industry could support price-fixing.

Oligopoly: definition

Under monopoly one firm has no rivals (Rittenberg and Tregarthen, 2009). On the contrary, in perfect competition many small firms co-exist, none with the power to influence price (Sloman and Sutcliffe, 2001). Equally important, as a combination of monopoly and competition, monopolistic competition represents the market with freedom to enter and many firms competing. However, each firm produces a differentiated product and therefore has some control over its price. Finally, oligopoly exists when few large firms can erect barriers against entry and share a large proportion of the industry. Moreover, firms are aware of their rivals and concerned about their response to competitive challenges (Allen, 1988). Consequently, oligopolies operate under imperfect competition.

Demand Curve

Oligopolies present kinked demand curves. These curves are downward-sloping, similar to traditional ones. However, they are distinguished by a convex bend at a discontinuity. This change in elasticity shows that price rises will not be match by competitors, yet prices reductions will (B&W). Therefore, firms will tend not to raise prices because a small increase will lose customers...

... middle of paper ...

...n_law [Accessed on 21/11/2010].

Rittenberg, L. and Tregarthen, T. (2009). Principles of Microeconomics, 2nd edition. New York: Flat World Knowledge, Inc.

Routledge, R.(2010). Bertrand competition with cost uncertainty. Economics Letters, no. 107, pp. 356–359.

Sab-Miller Report. (2003). On-trade and off trade. Available at: http://www.sabmiller.com/files/presentations/2003/000503/may03_ontradeofftrade_slides.pdf [Accessed on 21/11/2010].

Sloman, J. and Sutcliffe, M. (2001). Economics for business, 2nd edition. Harlow: Pearson Education Limited.

Vives, X. (2001). Oligopoly pricing: old ideas and new tools. Cambridge, MA: The MIT Press.

Woodhouse, S. (2002) English-Greek Dictionary: A Vocabulary Of The Attic Language. 10th edition. Padstow: TJI Digital.

World Bank. (2010). Indicators by country. Available at: [Accessed on 16/11/2010].