Oligopoly

An oligopoly describes a market situation in which there are limited or few sellers. Each seller knows that the other seller or sellers will react to its changes in prices and also quantities. This can cause a type of chain reaction in a market situation. In the world market there are oligopolies in steel production, automobiles, semi-conductor manufacturing, cigarettes, cereals, and also in telecommunications.

Often times oligopolistic industries supply a similar or identical product. These companies tend to maximize their profits by forming a cartel and acting like a monopoly. A cartel is an association of producers in a certain industry that agree to set common prices and output quotas to prevent competition. The larger the cartel, the more likely it will be that each member will increase output and cause the price of a good to be lower.

The majority of time an oligopoly is used describe a world market; however, the term oligopoly also describes conditions in smaller markets where a few gas stations, grocery stores or alternative restaurants or establishments dominate in their fields. A distinguishing characteristic of an oligopoly is the interdependence of firms. This means that any action on the part of one firm with respect to output, price, or quality will cause a reaction on the side of other firms.

Many times an oligopoly leads to price leadership between many firms. A price leadership is the practice in many oligopolistic industries in which the largest firm publishes its price list ahead of its competitors. Then these competitors feel the need to match those announced prices so they lower their prices. This is also termed a parallel pricing.

Oligopolies tend to be broken down into one of two distinguished groups. These groups are either a homogeneous or differentiated oligopoly. Homogeneous oligopolies have a standardized product and which include industrial, with petroleum serving as the standardized example, and also services such as banking. Differentiated oligopolies, where the products have some differences, are found in consumer goods industries, such as cars, biscuits, beer and electrical appliances.

There is however another oligopoly in which the manner of the corporation or industry is quite familiar to that of a monopoly. This oligopoly is termed collusive. A collusive oligopoly has the ability to behave in the manner of a m...

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...nt with the relevant demand curve of D1D1, and prices below Po are consistent with the relevant demand curve of D2D2. The kink in the demand curve occurs at the point labeled E. There is also a gap in the marginal revenue curve marked by MR1 and MR2.

There are many oligopolies in the world market that dominate their respective fields. They have the ability to control prices and quantities of their goods, forcing other companies in that specific industry to adjust to the oligopoly’s changes. The oligopoly has the power to do that because there are few sellers in the industry and each seller reacts to that of the other ones. This often leads to price leadership. This price leadership has a dramatic impact on consumers. Companies compete with the prices of goods and they keep lowering their prices. At the time these price decreases are beneficial for consumers; however, an oligopoly can afford to lower their prices and the smaller firms can not. As a result these smaller firms might be annihilated and enable the oligopoly to dominate the industry. If the oligopoly comes to dominate their industry they then have the ability to set prices higher, a terrible aspect for consumers.