Oligopoly and its characteristic features. Characteristic features of oligopoly. Determination of price and production volume

An oligopoly is a market structure in which a small number of sellers dominate and high barriers to entry for new producers are limited.

The first characteristic feature of an oligopoly is the small number of firms in the industry. This is evidenced by the etymology of the very concept of “oligopoly” (Greek “oligos” - several, “poleo” - sell, trade). Usually their number does not exceed ten Fischer, S. Economics / S. Fischer, R. Dornbusch, R. Schmalenzi. M., 2010. P.213.

The second characteristic feature of an oligopoly is high barriers to entry into the industry. They are associated, first of all, with economies of scale of production (economies of scale), which act as the most important reason for the widespread and long-term persistence of oligopolistic structures.

Oligopoly is one of the most common market structures in modern economies. In most countries, almost all branches of heavy industry (metallurgy, chemistry, automotive, electronics, shipbuilding and aircraft manufacturing, etc.) have just such a structure.

Figure 1 - Features of an oligopoly Microeconomics. Theory and Russian practice: textbook / volume. Auto; edited by A.G. Gryaznova, A.Yu. Yudanova. M., 2006. P.354

The most noticeable feature of an oligopoly is the small number of firms operating in the market. However, one should not think that companies can literally be counted on one’s fingers.

In an oligopolistic industry, as in monopolistic competition, there are often many small firms operating alongside large ones. However, a few leading companies account for the majority of the industry's total turnover, and it is their activities that determine developments.

Formally, oligopolistic industries usually include those industries where a few largest firms (in different countries, 3 to 8 firms are taken as the starting point) produce more than half of all output. If the concentration of production is lower, then the industry is considered to be operating under conditions of monopolistic competition.

In Russia, the raw materials industries, ferrous and non-ferrous metallurgy, are clearly oligopolistic in nature, i.e. almost all industries that managed to withstand the current crisis and on which the domestic economy still relies.

The concentration of production in the hands of 8 leading firms here ranges from 51 to 62%. Undoubtedly, the main sub-sectors of chemistry and mechanical engineering (fertilizer production, automotive industry, aerospace industry, etc.) are also oligopolized.

In sharp contrast to them are the light and food industries. In these industries, the share of the largest 8 firms accounts for no more than 10%. The state of the market in this area can confidently be characterized as monopolistic competition, especially since the differentiation of the product in both industries is extremely high (for example, the variety of varieties of sweets that are not produced by the entire food industry, but only by one of its sub-sectors - the confectionery industry) Industry economics: textbook / A.S. Pelikh et al. Rostov n/d, 2011. P.115.

Of course, establishing a quantitative boundary between oligopoly and monopolistic competition is largely arbitrary. After all, the two named types of markets also have qualitative differences.

In monopolistic competition, the decisive reason for an imperfect market is product differentiation. In an oligopoly, this factor also matters. There are oligopolistic industries in which product differentiation is significant (for example, the automotive industry). But there are also industries where the product is standardized (cement, oil industries, and most sub-sectors of metallurgy).

The main reason for the formation of an oligopoly is economies of scale in production. An industry acquires an oligopolistic structure if the large size of the firm provides significant cost savings and, therefore, if large firms in it have significant advantages over small ones.

However, there can never be too many large firms in an industry. The multi-billion dollar cost of their factories already serves as a reliable barrier to the entry of new companies into the industry.

In the usual course of events, a company enlarges gradually and by the time an oligopoly develops in the industry, a narrow circle of the largest firms has actually already been determined. In order to invade it, the “stranger” must immediately shell out the same amount that the oligopolists gradually invested in the business over decades. Therefore, history knows only a very small number of cases when a giant company was created “from scratch” through one-time huge investments (let us refer to AvtoVAZ in the USSR and Volkswagen in Germany; it is characteristic that in both cases the investor is the state, i.e. non-economic factors played a large role in the formation of these firms).

But even if funds were found to build a large number of giants, they would not be able to operate profitably in the future. After all, the market capacity is limited. Consumer demand is enough to absorb the products of thousands of small bakeries or auto repair shops. However, no one needs metal in quantities that could smelt thousands of giant domains.

An oligopoly is a market structure in which a small number of sellers dominate and high barriers to entry for new producers are limited.

The oligopolistic market is one of the most common market structures in the modern economy of various countries.

Almost all technically complex industries, such as metallurgy, automotive, electronics, shipbuilding and aircraft manufacturing, operate in an oligopolistic market.

Usually their number does not exceed ten. This situation has developed, for example, in the American steel industry, in the production of primary lead, copper, glass, fur products, etc.

The highest concentration is in the US automobile industry: three companies (General Motors, Ford and Chrysler) accounted for over 95% of national automobile production in the 1980s. Examples can be given of other branches of the US manufacturing industry (production of home refrigerators, vacuum cleaners, washing machines, light bulbs, postcards, telephones), which are characterized by a high concentration of production in just a few firms.

It should only be noted that these data, like all statistical indicators, have obvious shortcomings. They either exaggerate or understate the degree of concentration. They exaggerate because they do not take into account foreign and inter-industry competition (in the American market, for example, every fourth car is foreign-made), as well as competition from suppliers. They are downplayed because the degree of concentration is assessed at the national level, and not at the level of regions or individual cities, where the markets for certain goods and services are often dominated by two or three local companies (production of bricks, concrete, perishable food products, etc.). In addition, along with the classical (hard) oligopoly, in which 3-4 firms play the main role, there is also a soft (amorphous) oligopoly, when the main share of products is produced by 6-8 firms.

Oligopolistic situations can arise in industries producing both standardized goods (aluminum, copper) and differentiated ones (cars, washing powders, cigarettes, electrical appliances).

The oligopolistic market structure, as noted above, is predominant for modern industrialized countries. In Russia, the largest share of industrial products and some types of services is produced in oligopolistic industries. In most cases, the composition of participants in the Russian oligopolistic market sphere is still being formed, competition in some industries is not yet developed, in others it is becoming tough, sometimes merciless, and rapid changes are taking place in the structure of the market.

The most characteristic oligopolistic industries of the Russian Federation include the oil production and oil refining industries (taking into account the regional structure and localization of the market); ferrous metallurgy (by main types of products and taking into account the specialization of production); non-ferrous metallurgy (production of aluminum, tin, lead, zinc, etc.); production of electric machines and electric motors; machine tool industry; engine building; production of cars, buses and tractors; production of combines, excavator construction; production of televisions and radio equipment; production of electronic computer equipment; production of refrigerators, freezers, washing machines; chemical industry (most types of products); air transportation; shipping.

Oligopoly is typical for Russian conditions when selling grain, sugar, flax, and large quantities of livestock.

The second characteristic feature of an oligopoly is high barriers to entry into the industry. They are associated primarily with economies of scale of production (economies of scale), which act as the most important reason for the widespread and long-term persistence of oligopolistic structures. An industry acquires an oligopolistic structure if the large size of the enterprise provides significant cost savings and, therefore, if large enterprises have significant advantages over small ones.

The fact is that there can never be too many large enterprises in an industry. Their multi-billion dollar cost already serves as a reliable barrier to entry into the industry. But even if funds were found to build a large number of giants, they would not be able to operate profitably in the future. After all, the market capacity is limited.

In the US automobile industry in the 80s, for example, the minimum effective production volume was 300 thousand cars per year. Since many enterprises produced at least two models at the same time, the cost of such a plant usually exceeded $3 billion. Such large investments are not available to all companies, so objective prerequisites are created for maintaining the leading position of giant automobile factories. Note that if at the beginning of the 20th century the number of American automobile firms was close to 200, then already at the end of the 20s. their number did not exceed 50, and nowadays they can be counted on one hand.

Economies of scale are an important, but not the only reason, since the level of concentration in many industries exceeds the optimally efficient level. Oligopolistic concentration is also generated by some other barriers to entry into the industry. This may be due to a patent monopoly, as happens in knowledge-intensive industries controlled by companies such as Xerox, Kodak, IBM, etc. Throughout the entire period of validity of the patent (in the USA - 17 years), the company is reliably protected from internal competition.

Other reasons include monopoly control over rare sources of raw materials (for example, in the 60-70s, the world oil market was controlled by the Seven Sisters oil cartel), prohibitively high advertising costs (as in the production of cigarettes, soft drinks or in show business).

There are other barters, either naturally formed or artificially created. Barters vary in strength. Although there are no insurmountable barriers, they arise again and again.

The third characteristic feature of oligopoly is pervasive interdependence. An oligopoly occurs when the number of firms in an industry is so small that each of them is forced to take into account the reaction of competitors when forming its economic policy. Just as a chess player must take into account the possible moves of his opponent, an oligopolist must be prepared for various (often alternative) options for the development of the market situation as a result of different behavior of competitors. With a monopolistic structure, this situation does not arise (there are no competitors); with perfect and monopolistic competition, this also does not happen (on the contrary, there are too many competitors, and it is not possible to take their actions into account).

Meanwhile, the reaction of competing firms may be different, and it is difficult to predict. Oligopolistic interdependence is the need to take into account the reaction of competing firms to the actions of a large firm in an oligopolistic market.

Any model of oligopoly must take into account the actions of competitors. This is an additional significant limitation that must be taken into account when choosing a behavior pattern for an oligopolistic firm. Therefore, there is no standard model for determining the optimal production volume and product price for an oligopoly.

We can say that determining the pricing policy of an oligopolist is not only a science, but also an art. Here, an important role is played by the subjective qualities of the manager, such as intuition, the ability to make non-standard decisions, take risks, courage, determination, etc.

There are reasons that explain the difficulty of using formal economic analysis to explain the price behavior of an oligopoly:

1) oligopoly includes a variety of special market structures. There are “hard” and “loose” oligopolies. A “hard” oligopoly occurs when 3–4 enterprises dominate the entire market. “Vague” is possible when 8 - 10 firms control 70 - 80% of the market. The many types and types of oligopoly make it difficult to develop any simple market model that will provide a general explanation of oligopolistic pricing behavior;

2) universal interdependence and the inability to predict with certainty the behavior of competitors complicate the situation in determining demand and marginal income, and this affects the setting of price and production volume.

Despite these difficulties, two interrelated features of oligopolistic pricing emerge. On the one hand, oligopolistic prices tend to be inflexible, i.e., “sticky”. On the other hand, when oligopolistic prices change, it is likely that businesses change their prices all together. Oligopolistic pricing behavior involves incentives and concerted action, or collusion, in setting prices.

Under conditions of high uncertainty, oligopolists behave differently. Some try to ignore, compete and act as if the industry is dominated by perfect competition. Others, on the contrary, try to anticipate the behavior of their opponents and closely monitor their every move. Finally, some of them consider secret collusion with opposing firms to be the most profitable.

In reality, all three of these types of market behavior can occur simultaneously. Since the company's management must constantly make many decisions, it is practically impossible for it to predict the reaction of competitors to its every action. Therefore, on many tactical issues concerning secondary aspects, decisions are made completely independently. On the other hand, when developing strategic decisions, the company works to optimize relationships with rivals. The task of economic theory is to study the rules of rational choice using the apparatus of game theory. Each “player” is looking for a move to maximize his own benefit and at the same time limit his competitor’s freedom of choice. In search of the “simplest” path, rival firms can enter into direct collusion, agreeing on a common pricing policy, division of sales markets, etc. The latter case is the most dangerous for society and, as a rule, is prohibited by antimonopoly legislation.

Let's look at four different pricing models to understand the essence of oligopoly:

1) pricing not based on conspiracy: one of the enterprises changes the price, the consequence is a change in demand for the industry’s products (broken demand curve);

2) pricing due to collusion - a tendency to maximize the total profit of enterprises;

3) adjustment of prices to the prices of the dominant enterprise (tacit secret agreement);

4) pricing based on the cost-plus principle.

Related information.

Oligopoly (from the ancient Greek lyagpt - “small in number”, and rshlEshch - “I sell, trade”) is a type of market structure of imperfect competition in which a limited number of large enterprises operate in the industry, and entry into the industry is limited by high barriers. Oligopoly occurs in industries that produce both standardized products (copper, aluminum, sugar) and differentiated products (automobiles, tobacco, liquor, brewing, etc.).

Its first and main feature is the presence of a limited number of manufacturers on the market. Typically, these companies produce a similar but not identical product, have a large production volume, and each controls a significant market share. Examples of oligopoly are producers of non-ferrous metals, cars, tobacco products, etc.

Another characteristic feature of an oligopoly is a high degree of interdependence and coordination of actions, since the number of enterprises in the industry is so limited that each of them is forced to take into account the reaction of competitors when making decisions on prices and production volume. Firms that know that their actions will affect competitors in an industry make decisions only after understanding how their rivals will react.

The dependence of the behavior of each firm on the reaction of competitors is called an oligopolistic relationship. But an oligopolistic relationship can lead not only to fierce confrontation, but also to agreement. The latter occurs when oligopolistic firms see opportunities to jointly increase their income by raising prices and concluding an agreement to share the market. If the agreement is open and formalized and involves all or most of the producers in the market, it results in the formation of a cartel.

Oligopolistic firms mainly use non-price competition methods. Oligopoly is one of the most common market structures in modern economies. In most countries, almost all branches of heavy industry (metallurgy, chemistry, automotive, electronics, shipbuilding and aircraft manufacturing, etc.) have just such a structure.

Since there is no general model of oligopoly, firms in the same industry can interact both as monopolists and as competitive firms. It all depends on the nature of the interaction between firms.

With the coordinated behavior of a firm, oligopolists take into account and coordinate market strategy and tactics by imitating pricing and competing strategies with each other (cooperative strategy), price and supply will tend to be monopolistic, and the extreme form of such a strategy will be a cartel.

Uncoordinated behavior of firms, i.e. When firms follow a non-cooperative strategy, pursue an independent strategy aimed at improving the position of the firm, prices and strategy will approach competitive ones, which can lead to an extreme form of this manifestation - “price wars”.

However, not every company can afford such behavior. If a firm's share is a third of the market, then the response of other firms that have coordinated their actions will lead to its displacement from the industry.

Therefore, such a strategy can only be implemented by a leading company that controls more than half of the market. Interconnection and coordination in an oligopoly are very closely related to pricing policies.

Thus, the characteristic features of oligopoly are:

1) limited number of firms;
2) high barriers to entry into the industry, limited access;
3) significant concentration of production in individual firms;
4) strategic behavior of firms, their interdependence.

Based on the concentration of sellers in the same market, oligopolies are divided into dense and sparse. Dense oligopolies conventionally include those industry structures that are represented on the market by 2-8 sellers. Market structures that include more than 8 economic entities are classified as rarefied oligopolies. This kind of gradation allows us to evaluate the behavior of enterprises in conditions of dense and sparse oligopoly differently.

In the first case, due to the very limited number of sellers, various types of conspiracies are possible regarding their coordinated behavior on the market, while in the second case this is practically impossible.

Based on the nature of the products offered, oligopolies can be divided into ordinary and differentiated.

An ordinary oligopoly is associated with the production and supply of standard products. Many standard products are produced under oligopoly conditions - steel, non-ferrous metals, building materials.

Differentiated oligopolies are formed on the basis of the production of a diverse range of products. They are typical for those industries in which it is possible to diversify the production of goods and services offered.

It is usually said that oligopolistic industries are dominated by the “Big Two”, “Big Three”, “Big Four”, etc. More than half of sales come from 2 to 10 companies. For example, in the United States, four companies account for 92% of all automobile production.

Oligopoly is also characteristic of many industries in Russia. Thus, passenger cars are produced by five enterprises (VAZ, AZLK, GAZ, UAZ, Izhmash). Dynamic steel is produced by three enterprises, 82% of tires for agricultural machines - by four, 92% of soda ash - by three, all production of magnetic tape is concentrated in two enterprises, motor graders - in three.

But it is not always possible to judge the structure of the market on the basis of indicators related to the entire national economy. Thus, often certain firms that own an insignificant share of the national market are oligopolists in the local market (for example, shops, restaurants).

If a consumer lives in a big city, he is unlikely to travel to the other end of the city to buy bread or milk. Two bakeries located in his area of residence may be oligopolists.

Of course, establishing a quantitative boundary between oligopoly and monopolistic competition is largely conditional. After all, the two named types of markets have other differences from each other. Products in an oligopolistic market can be either homogeneous, standardized (copper, zinc, steel), or differentiated (cars, household electrical appliances). The degree of differentiation affects the nature of competition.

For example, in Germany, car factories usually compete with each other in certain classes of cars (the number of competitors reaches nine). Russian car factories practically do not compete with each other, since most of them are narrowly specialized and turn into monopolists.

An important condition affecting the nature of individual markets is the height of the barriers protecting the industry (the amount of initial capital, control of existing firms over new technology and the latest products through patents and technical secrets, etc.).

The fact is that there can never be too many large firms in an industry. The multi-billion-dollar cost of their factories already serves as a reliable barrier to the entry of new companies into the industry. In the usual course of events, a company enlarges gradually and by the time an oligopoly develops in the industry, a narrow circle of the largest firms has actually already been determined. To invade it, you must immediately have the same amount that the oligopolists gradually invested in the business over decades. Therefore, history knows only a very small number of cases when a giant company was created “from scratch” through one-time huge investments (for example, Volkswagen in Germany, however, the investor in this case was the state, i.e. they played a large role in the formation of this company non-economic factors).

The level of density of an oligopolistic market structure is measured by the number of enterprises in a particular industry and their share of total industry sales within the national economy. Thus, by varying the number of enterprises, it is possible to determine the degree of concentration of production, and, consequently, supply in the branch of social production under study.

At the same time, it should be emphasized that it would be imprudent to focus only on the scale of the national economy. Oligopolistic structures can be formed both at the regional and local economic levels. So, due to the specificity of the opportunities for consumption of ready-made concrete in local markets (district, small city), oligopolistic structures are also formed, as well as at the regional level in the supply sector, for example, bricks.

However, we should not forget about two important points: inter-industry competition and import of products. The strength of oligopoly decreases under the influence of the supply of products by enterprises in other industries that have approximately the same consumer properties as the products of oligopolists (for example, gas and electricity as a source of heat, copper and aluminum as raw materials for the manufacture of electrical wires). The weakening of the oligopoly is also facilitated by the import of similar goods or their substitutes. Both of these factors can contribute to the formation of more competitive structures compared to purely sectoral market structures.

oligopoly pricing model

Oligopoly and its main models.

1. The essence of oligopoly and its characteristic features

2. Main indicators for measuring market concentration (IndexHerfindahl - Hirschman)

3.Cournot model (duopoly)

4. Oligopoly based on collusion

5. Oligopoly not based on collusion

6.Cost models

1) The essence of oligopoly and its characteristic features

Oligopoly- a type of market structure in which several firms and each of them is able to independently influence the price.

This includes:

Aluminum production;

Copper production;

Steel production;

Automotive industry;

Refrigerators, vacuum cleaners, etc.

Main features:

1) a small number of firms dominating the market

2) products can be homogeneous or differentiated

3) restrictions on the access of new firms to the market (natural barriers include: economies of scale, which can make the coexistence of many firms in the market unprofitable, since this requires large financial resources. We are talking about a natural oligopoly. In addition, patenting and licensing production technologies. In addition, firms may take strategic actions that make it difficult for new firms to enter a given market)

4) each firm is able to influence the market price, but this depends on the nature of the interaction between firms. Collusion has a significant impact on pricing

5) general interdependence of firms (the oligopolist must anticipate the reaction of competitors to changes in its pricing strategy, taking into account that competitors can predict the situation. All this is called oligopolistic relationship.

2) Main indicators for measuring market concentration (Index Herfindahl - Hirschman)

In practice, when studying a particular market structure, they use such a characteristic as its concentration. This is the degree to which one or more firms dominate the market. There is an indicator that reflects this concentration. This concentration ratio is the percentage of all sales for a certain number of firms. The most common is the “share of four firms”: their sales volume is divided by the sales volume of the entire industry. There may be “share of six firms”, “share of eight firms”, etc. But this indicator has a limitation: it does not take into account the difference between monopolies and oligopolies, because the coefficient will be the same where one firm dominates the market and where 4 firms share the market. The disadvantage is overcome using the Herfindahl-Hirschman index. It is calculated by squaring the market share of each firm and summing the results.

Н=d 1 2 +d 2 2 +…+d n 2, where

n is the number of competing firms;

d 1, d 2 … dn - share of firms in percent

As the concentration increases, the index increases. Its maximum value is inherent in a monopoly, where it is equal to 10,000. Let's consider what the choice of optimal production volume and price is like in an oligopoly. This means it is a choice that maximizes profit. Since the choice depends on the behavior of firms, there is no single model of firm behavior in an oligopoly. There are different models:

1) Cournot model

2) model based on conspiracy

3)model. not based on collusion (prisoner's dilemma)

4)tacit collusion (leadership in general)

3) Cournot model (duopoly)

The model was introduced in 1938 by French economist Augustin Cournot.

Duopoly- a special case of oligopoly, when only two firms compete with each other in the market.

Firms produce a homogeneous product and the market demand curve is known.

The output of one firm a 1 changes depending on how much its management thinks a 2 will grow. As a result, each firm builds its own reaction curve. It tells us how much a firm will produce given the expected output of its competitor. In equilibrium, each firm sets its output according to its reaction curve, so the output equilibrium is at the intersection of the two reaction curves. This equilibrium is the Cournot equilibrium. Here, each duopolist sets the output that maximizes its profit given its competitor's output. This equilibrium is an example of what in game theory is called a Nash equilibrium, where each poker player does the best he can do given his opponent's actions. As a result, no player has any incentive to change their behavior. This game theory was described by Neumann and Mongerstern in their work “Game Theory and Economic Behavior” (1944).

4) Oligopoly based on conspiracy.

Collusion- an actual agreement between firms in an industry to set fixed prices and production volumes.

In many industries, collusion is illegal. Factors contributing to collusion include:

a) existence of a legal framework

b) high concentration of sellers

c) approximately the same average costs for firms in the industry

d) the impossibility of new firms entering the market

It is assumed that with secret collusion, each firm will equalize its prices when prices decrease and when prices increase. At the same time, firms produce homogeneous products and have the same average costs. Then, when choosing the optimal volume of production that maximizes profit, the oligopolist behaves like a pure monopolist.

If two firms collude, then they construct a contract curve that shows the different combinations of output of the two firms that maximize profits. Secret collusion is significantly more profitable for firms compared to perfect equilibrium and compared to Cournot equilibrium, because they will produce less product while charging a better price.

(question 5) Oligopoly not based on collusion

If there is no secret collusion (inherent in the United States), then oligopolists, when setting prices, are faced with prisoner's dilemma. This is a classic example of game theory in economics.

Two prisoners were accused of committing a crime together. They are sitting in different cells and cannot communicate with each other. If both confess, the prison term for each will be 5 years. If not, then the case is not completed and everyone will get 2 years. If the first confesses and the other does not, then the first will receive 1 year in prison, and the second 10 years.

There is a matrix of possible results:

Prisoners face a dilemma: whether or not to confess to committing a crime. If they could agree not to confess, they would receive 2 years in prison. But if such a possibility existed, they could not trust each other. If the first prisoner does not confess, then he runs the risk that another will be able to take advantage of this. Therefore, no matter what the first does, it is more profitable for the second to confess. Then it is more likely that both will confess and go to prison for 5 years.

Oligopolists also often face a prisoner's dilemma. Let there be two companies. They are the only sellers on the market for this product. They are faced with a dilemma: should they set a high or low price?

1) If both firms set a high price, they will receive 20,000,000 rubles each.

2) If they set a relatively low price, they will receive 15,000,000 rubles.

3) If the first company raises the price and the second lowers it, then the first will receive 10,000,000 rubles, and the second 30,000,000 rubles at the expense of the first.

Conclusion: it is obvious that it is beneficial for each company to set a relatively low price, regardless of what the competitor does and receive 15,000,000 rubles. The prisoner's dilemma explains price rigidity in an oligopoly.

(question 6) Cost models

A kinked demand curve describes the behavior of a firm that does not collude with competitors. The model is based on the fact that there are possible options for the behavior of market participants. If one of the competitors changes the price, others will be able to choose one of the possible solutions:

1) Align prices and adjust to the new price

2) Do not react to price changes by one of your competitors

3) Let one firm raise prices, then the rest will raise prices following this firm. Firms in the industry will lose some sales, so if one firm increases its price, others will not respond.

4) Let one company in the market reduce prices, then if competitors do not reduce prices, then the company takes away some of their buyers. Therefore, if one firm reduces prices, then other firms do the same.

Conclusion: reducing prices following a competitor’s price reduction and not reacting to the latter’s price increase is the essence of a broken “demand curve” in an oligopoly market.

There is a kinked demand curve in an oligopoly market.

P- unit price;

Q- quantity of products;

D-demand;

P O-the base price existing on the market

If firm A raises the price above the existing base price (P o), then competitors most likely will not raise the price. As a result, the company will lose some of its consumers. The demand for its products above point A is very elastic. If firm D lowers its price, its competitors will also lower their price. Therefore, at a price below P o, demand is less elastic. A price cut by Firm A can also cause a price war, with firms taking turns cutting prices until some of them lose money and close production. Therefore, in war conditions, the strongest wins. But the policy is risky, so it is not known which of the companies is more “brisk”.

Cost+ model The firm determines the level of costs per unit of production, and then adds the planned profit level (approximately 10%-15%) to the costs. The principle is used where products are differentiated (for example, in the automotive industry). The model shows that the firm does not adjust its costs to the market price. Such behavior of the company is possible in the absence of tangible competitive pressure.

Oligopoly (oligopoly) as a market model, it represents a small number of jointly operating firms - producers of a given product, which act together.

Oligopolistic market type- a complex market situation when several companies sell a standardized or differentiated product, and the share of each participant in total sales is so large that a change in the quantity of products offered by one of the companies leads to a change in price. Access to an oligopolistic market is difficult for other companies. Price control in such a market is limited by the interdependence of firms (except in cases of collusion). Typically, there is strong non-price competition in an oligopolistic market.

Why do oligopolies arise?

The answer is simple: where economies of scale are significant, sufficiently efficient production is only possible with a small number of producers. In other words, efficiency requires that the production capacity of each firm occupy a large share of the total market, and many small firms cannot survive.

The realization of economies of scale by some companies involves the number of competing producers being simultaneously reduced through bankruptcy or merger. For example, in the automotive industry during its formation there were more than 80 firms. Over the years, the development of mass production technologies, bankruptcies and mergers have weakened the struggle between manufacturers. Now in the United States, the Big Three (General Motors, Ford and Chrysler) account for about 90% of sales of cars produced in the country.

The distinctive features of oligopoly include:

o scarcity - dominance in the market of goods and services by a relatively small number of firms. Typically when we hear:

"Big Three", "Big Four" or "Big Six", it is obvious that the industry is oligopolistic;

o standardized or differentiated products- many industrial products (steel, zinc, copper, aluminum, cement, industrial alcohol, etc.) are standardized in a physical sense and are produced under oligopoly conditions. Many consumer goods industries (cars, tires, detergents, cards, breakfast cereals, cigarettes, many household electrical appliances, etc.) are differentiated oligopolies;
o barriers to entry I am in an oligopolistic market - absolute cost advantage, economies of scale, the need for large start-up capital, product differentiation, patent protection for the production of goods;
o fusion effect- the reason for a merger can be for various reasons, but the merger of two or more firms allows the new company to achieve greater economies of scale and lower production costs;
o universal interdependence- no firm in an oligopolistic industry would dare change its pricing policy without trying to calculate the most likely response of its competitors.

Along with oligopoly in the market there are:

o duopoly- a type of industry market in which there are only two independent sellers and many buyers;
o oligopsony- a market in which several large buyers operate.

Determination of price and production volume

How are price and output determined in an oligopoly? Pure competition, monopolistic competition and pure monopoly are fairly clear-cut market classifications, but oligopoly is not. There are both strict oligopoly in which two or three firms dominate the entire market, and vague oligopoly, in which six or seven firms share, say, 70 or 80% of the market, while the competitive environment takes up the remainder.

The presence of different types of oligopoly makes it difficult to develop a simple market model that will explain oligopolistic behavior. Pervasive interdependence complicates the situation, and the firm's inability to predict the responses of its competitors makes it virtually impossible to determine the demand and marginal revenue faced by the oligopolist. Without such data, a company cannot even theoretically determine the price and production volume that maximizes its profits.

Figure 12.1 presents methods of oligopolistic price control.

Rice. 12.1.

1. Study of Oligopolistic Pricing It is advisable to start with an analysis of the broken demand curve (Fig. 12.2). It occurs in a situation where an oligopolist reduces prices below those established in the market in order to force its competitors to do the same. The figure shows that the demand curve is broken (/)2£|), and the marginal income curve has a vertical discontinuity. Due to this there is no change in price R, does not occur in the quantity of product supplied, which indicates the price rigidity that characterizes oligopolistic markets.

Within certain limits, any increase in prices worsens the market situation. Thus, an increase in prices by one company poses the danger of the market being captured by competitors who, by maintaining low prices, can lure away its former customers. However, lowering prices in an oligopoly may not lead to the desired increase in sales, since competitors, duplicating this maneuver, will maintain their quotas in the market. As a result, the leading company will not be able to increase the number of customers at the expense of other companies. In addition, this step is fraught with a dumping price war. The proposed model only explains well the inflexibility of prices, but does not allow us to determine their initial level and growth mechanism. The latter is easier to explain through the method of secret collusion of oligopolists.

Rice. 12.2.

2. Collusion (clandestine collusion, collusion) occurs when firms reach a tacit (not expressed in a formal contract) agreement to fix prices, allocate markets, or limit competition among themselves. Oligopolists colluding tend to maximize overall profits. However, differences in demand and costs, the presence of a large number of firms, fraud through price discounts, recessions, and antitrust laws are obstacles to this form of price control.

Figure 12.3 shows that profit maximization (shaded rectangle) is only achievable if each firm in the oligopoly sets a price R and produces a volume of output equal to Q.

The desire of oligopolists to collude contributes to the formation of cartels - associations of firms that coordinate their decisions on prices and production volumes. This requires the development of a joint policy, the establishment of quotas for each participant and the creation of a mechanism for monitoring the implementation of decisions made. The establishment of uniform monopoly prices increases the revenue of all participants in the conspiracy, but price increases are achieved through a mandatory reduction in sales volume. Currently, explicit cartel-type agreements are rare. Much more often one can observe implicit (hidden) agreements.

3. Price leadership, or price leadership (price leadership) - This is an informal price setting method in which one firm (the price leader) announces a price change and others follow.

Rice. 12.3.

The companies behind the leader soon record identical changes. Maintaining prices at a certain level set by the leading company is called a “price umbrella” (price umbrella). In this case, the price leader actually performs a signaling role, which eliminates the need for secret collusion. Essentially, it is the practice whereby the dominant firm, usually the largest or most efficient in the industry, changes its price and all other firms automatically follow the change.

4. Pricing based on the "cost plus" or "cost plus" principle (traditional pricing, cost-plus pricing, markup pricing) - the traditional method of setting prices used by oligopolies. This is a pricing method in which the selling price is determined on the basis of the full cost of production by adding to it a “mark-up” of a certain percentage. This method of pricing is not incompatible with collusion or price leadership. The famous American company General Motors uses cost-plus pricing and is a price leader in the automotive industry.

Efficiency of oligopoly

Is an oligopoly an efficient market structure? There are two points of view on the economic consequences of oligopoly.

According to the traditional view, an oligopoly operates similarly to a monopoly and can lead to the same results as a pure monopoly, although an oligopoly retains the appearance of competition among several independent firms.

From a Schumpeter-Galbraith perspective, oligopoly promotes scientific and technical progress, and therefore results in better products, lower prices, and higher levels of output and employment than if the industry had been organized differently.