An oligopoly is a small group of businesses, two or more, that control the market for a certain product or service. This gives these businesses huge influence over price and other aspects of the market.
Oligopolies are price setters rather than price takers. Additional sources of barriers to entry often result from government regulation favoring existing firms making it difficult for new firms to enter the market.
High barriers of entry prevent sideline firms from entering market to capture excess profits. Product differentiation Product may be homogeneous steel or differentiated automobiles.
Oligopolies have perfect knowledge of their own cost and demand functions but their inter-firm information may be incomplete. Buyers have only imperfect knowledge as to price,  cost and product quality. Interdependence The distinctive feature of an oligopoly is interdependence. Each firm is so large that its actions affect market conditions.
For example, an oligopoly considering a price reduction may wish to estimate the likelihood that competing firms would also lower their prices and possibly trigger a ruinous price war. Or if the firm is considering a price increase, it may want to know whether other firms will also increase prices or hold existing prices constant.
This anticipation leads to price rigidity as firms will be only be willing to adjust their prices and quantity of output in accordance with a "price leader" in the market.
This high degree of interdependence and need to be aware of what other firms are doing or might do is to be contrasted with lack of interdependence in other market structures.
In a perfectly competitive PC market there is zero interdependence because no firm is large enough to affect market price.
All firms in a PC market are price takers, as current market selling price can be followed predictably to maximize short-term profits.
In a monopoly, there are no competitors to be concerned about. Non-Price Competition Oligopolies tend to compete on terms other than price. Loyalty schemes, advertisement, and product differentiation are all examples of non-price competition. Oligopolies in countries with competition laws[ edit ] Oligopolies become "mature" when they realise they can profit maximise through joint profit maximising.
As a result of operating in countries with enforced competition laws, the Oligopolists will operate under tacit collusion, being collusion through an understanding that if all the competitors in the market raise their prices, then collectively all the competitors can achieve economic profits close to a monopolist, with out evidence of breaching government market regulations.
Hence, the kinked demand curve for a joint profit maximising Oligopoly industry can model the behaviours of oligopolists pricing decisions other than that of the price leader the price leader being the firm that all other firms follow in terms of pricing decisions.
As the joint profit maximising achieves greater economic profits for all the firms, there is an incentive for an individual firm to "cheat" by expanding output to gain greater market share and profit.
In Oligopolist cheating, and the incumbent firm discovering this breach in collusion, the other firms in the market will retaliate by matching or dropping prices lower than the original drop. Hence, the market share that the firm that dropped the price gained, will have that gain minimised or eliminated.
This is why on the kinked demand curve model the lower segment of the demand curve is inelastic. As a result, price rigidity prevails in such markets. Modeling[ edit ] There is no single model describing the operation of an oligopolistic market.
However, there are a series of simplified models that attempt to describe market behavior by considering certain circumstances.Types of Market Structures on the Basis of Competition.
For example, Iraq and Iran have monopoly on oil wells and South Africa has monopoly of diamonds. Such monopolies are termed as raw material monopolies. In oligopoly market structure, the price and output decided by a seller affects the sales and profit of its competitors.
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The report is prepared to explain how oligopolistic market model is the best model to relate to the current increase in the price of Oil. The Oil petroleum Organization is analyzed deeply which clearly depicts the oligopoly style of marketing by the members of OPEC.
It has also examined by lot of. The proprietorship, or sole proprietorship, is the least complex, most basic and common form a business can take, because. No legal process is required to start a proprietorship. Solely owned by one person, the proprietor.
The whole revenue of the firm comes to the proprietor as personal income, which is subject to personal income tax. An oligopoly consists of a select few companies having significant influence over an industry.
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Industries like oil & gas, airline, mass media, . In an Oligopoly market structure, there are a few interdependent firms dominate the market. They are likely to change their prices according to their competitors. For example, if Coca-Cola changes their price, Pepsi is also likely to.