Skip to main content

Table of Contents

  1. Topic pack - Microeconomics - introduction
  2. 1.1 Competitive Markets: Demand and Supply
  3. 1.1 Competitive Markets: Demand and Supply - notes
  4. 1.1 Competitive markets - questions
  5. 1.1 Competitive markets - simulations and activities
  6. 1.2 Elasticities
  7. 1.2 Elasticities - notes
  8. Section 1.2 Elasticities - questions
  9. Section 1.2 Elasticities - simulations and activities
  10. 1.3 Government intervention
  11. 1.3 Government Intervention - notes
  12. 1.3 Government intervention - questions
  13. 1.3 Government intervention - simulations and activities
  14. 1.4 Market failure
  15. 1.4 Market failure - notes
  16. Section 1.4 Market failure - questions
  17. Section 1.4 Market failure - simulations and activities
  18. 1.5 Theory of the firm
  19. 1.5 Theory of the firm - notes (HL only)
    1. Cost theory
    2. Calculating costs
    3. Short-run
    4. Long-run
    5. Internal economies of scale
    6. External economies of scale
    7. Diseconomies of scale
    8. Long run cost curves
    9. The very long run
    10. Revenues
    11. Revenues - notes
    12. Profit
    13. Profit - notes
    14. Combining revenue and cost curves
    15. Profit maximisation - price taker
    16. Profit maximisation - price setter
    17. Alternative aims of firms
    18. Profit, sales and revenue maximisation
    19. Perfect competition
    20. Perfect competition - notes
    21. Short-run to long-run - profits
    22. Short-run to long-run - losses
    23. Shut down price, break-even price
    24. Efficient allocation of resources
    25. Monopoly and oligopoly
    26. Monopoly and oligopoly - introduction
    27. Growth and power
    28. The model of monopoly
    29. Monopoly - profit maximisation
    30. Monopoly equilibrium
    31. Monopoly v. perfect competition
    32. Economic efficiency in perfect competition
    33. Economic efficiency in perfect competition and monopoly
    34. Efficiency and market structure
    35. Monopolistic competition
    36. Monopolistic competition - notes
    37. Monopolistic competition in the short-run
    38. Monopolistic competition in the long run
    39. Oligopoly
    40. Oligopoly - notes
    41. Advertising and branding
    42. Product innovation
    43. Theories of oligopoly - non-collusive
    44. The kinked demand curve theory
    45. Kinked demand curve - change in cost
    46. Cut-price competition (predatory pricing)
    47. Theories of oligopoly - collusive
    48. Forms of collusion
    49. Price discrimination
    50. Equilibrium of the discriminating monopolist
  20. Section 1.5 Theory of the firm - questions
  21. Section 1.5 Theory of the firm - simulations and activities
  22. Print View

Oligopoly - notes

The nature of oligopoly / assumptions of the model

S:\triplea_resources\DP_topic_packs\business management\student_packs\media_ops_management\images\waste_tap.jpg

Oligopoly is a market form in which there are only a few firms in the industry with many buyers; so market supply will be concentrated in the hands of relatively few producers, although an industry might still be said to be oligopolistic where several smaller firms existed alongside the few large firms that dominate; the wholesale petrol market provides a suitable example of the latter. The markets for cigarettes, ice cream, confectionery (candy), fizzy drinks (soda), high street banks, airline carriers, domestic appliances, soap powders and supermarket chains all provide good examples of oligopoly in many countries across the world.

Where the few firms produce an identical product, this is known as perfect oligopoly, and where, more commonly, the products are differentiated, this is referred to as imperfect oligopoly. The case of duopoly, where there are only two firms in the industry, is a special case of oligopoly.

However, the absolute number of firms in the market is less significant than the way in which they behave and the relationship between the firms that comprise the industry. In the case of the monopolist, for example, independent price and output decisions can be made, with the only consideration being the customer's reaction to the change in price. However, in oligopoly, where there is competition amongst the relatively few, each firm has to also try to assess the reaction of its rivals to a change in price, as each firm will occupy a sufficiently important position within the industry for its particular price and output decisions to have a significant impact on its competitors. If a firm in oligopoly is thinking of raising the price of its product, it has to assess whether its rivals will do likewise or keep price down in order to gain more custom. Oligopoly is characterised by interdependence between the firms that comprise the industry, and by reactive market behaviour.

Oligopoly has emerged as the most prevalent market form in the industrialised world. This can partly be explained by the existence of economies of scale, especially in manufacturing, encouraging the growth of large scale production; inevitably, as firms grow in size, the number of firms supplying the market falls, and hence the tendency towards oligopoly power. Moreover, once established, this power may be sustained by various barriers to entry, similar to those that exist under monopoly.

The importance of non-price competition

As we shall see from our discussion of oligopoly, an important feature of oligopolistic markets, i.e. ones dominated by a few large firms, is the tendency towards relative price stability. Lack of price movement will occur most obviously where firms collude with each other to collectively fix their prices, but it may also occur in a situation of what is known as non-collusive oligopoly, where no such price agreements exist; inderdependent firms may well come to the conclusion that there is no point in 'cutting each others throats' by engaging in price warfare in the longer term as this could be disastrous for all the combatants, although there may be a tendency towards occasional short bursts of price cutting. However, this absence of price competition does not necessarily mean an absence of competition: oligopolistic firms are likely to compete in a variety of non-price forms.

Non- price competition occurs where firms attempt to win a competitive advantage over their rivals by strategies other than reducing prices. Non-price competition inevitably involves product differentiation. Here, oligopolistic competitors try to create separate markets in which they can command consumer loyalty through the creation of actual or imagined differences in the goods or services they offer, which are essentially the same as their rivals. This is in contrast to perfect competition where the good on offer, perhaps an agricultural one, is homogeneous, and product differentiation is difficult e.g. one carrot is pretty much the same as another.

Product differentiation is extremely widespread amongst the whole variety of consumer goods and services that we buy e.g. washing machines, television sets, home computers, motor cars, washing powders, soft drinks, packaged holidays and financial services. These are all differentiated one from another in a variety of ways, including shape, size, quality and image.

Non-price competition may take a variety of forms, including:

  • Advertising
  • Branding
  • Product innovation
  • Packaging
  • The provision of after sales services e.g. product guarantees
  • Free samples and gift offers.