Oligopoly

Market Structure: Oligopoly;

THE FOLLOWING NOTES ARE THE BASIC CONCEPTS IN THE MAINSTREAM (CAPITALISTIC, NEO-CLASSICAL) ECONOMICS.

Conditions

  • A few companies dominate a market.
  • Not easy for a new company to enter the market

Strategies

  • Collusion: Major companies join together (a cartel) and act as if they were a monopoly
  • Competition
  • In Between

Features

  • In the competitive oligopoly, the price tends to stick as it is.
    • If one company raises the price => others will remain the same => the demand will fall as the revenue
    • If one company lowers the price => others will follow => no change of market share and the revenue of all companies will fall
    • Therefore, the price competition is not common, rather companies prefer differentiation (branding and marketing)
  • Cartels
    • Collusion can be explicit (OPEC) or implicit (Price leader)
    • Market works like a monopoly
      • Price is set above the Average Cost (AC)
      • Quantity is less than the equilibrium
      • The market is allocatively / productively inefficient

Price Wars

  • Some companies might cut the price temporarily to drive other competitors out of a market.
  • Customers might benefit the low price in the short term but in the long term, winning companies may exploit the market with the power of monoploy

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