Oligopoly is a form of imperfect competition and in many ways resembles a pure monopoly. The term "oligopoly" (gr. oligos - a little, little) was introduced into scientific economic circulation by the English economist E.
Chamberlin to denote the small number of market participants. An oligopoly is a market in which a few firms sell standardized or differentiated products, access to which is difficult for other firms, price control is limited by the interdependence of firms, and there is strong price competition. Oligopsony is a market in which only a few buyers operate. In economic theory, oligopoly is considered as the most common market structure, which is characterized by a small number of producers of the same product. Oligopoly is a market model that covers a large segment of the market - from pure monopoly to monopolistic competition.
Oligopoly is characterized by a number of features:
- there is an interdependence of firms in the industry, the strategy of market behavior of each of them is formed taking into account the actions of a few counterparties;
– the industry is dominated by a few very large firms(usually two to five);
- the dominant firms are so large that the volume of production of each of them can affect the volume of industry supply. Therefore, oligopolistic firms can influence the market price, i.e. exercise monopoly power in the market;
- the product of an oligopoly can be both homogeneous (homogeneous) and differentiated;
– entry into the industry is limited by various barriers;
The demand line for an oligopoly's product is similar to the demand line for a monopoly's product.
Oligopoly can take several forms:
Duopoly - a situation where two large firms dominate the market. They divide the sectoral volume of demand in a proportion corresponding to the production possibilities of each of them. The duopoly is minimum size oligopoly (hard oligopoly);
- A pure oligopoly is a market structure in which eight to ten firms operate in an industry with approximately equal sales in the market. The concepts of "big five", "big ten", etc., arise;
- vague oligopoly - a position in the market in which five or six large firms share about 80% of the industry's sales volume among themselves, and the rest falls on the competitive environment (outskirts). The competitive margin may be numerous, and the firms within it may be pure competitors or monopolistic competitors.
There are two main types of oligopoly:
- a homogeneous oligopoly consists of firms producing a homogeneous, standardized product (oil, steel, cement, copper, aluminum);
- a heterogeneous oligopoly consists of firms producing differentiated products (cars, cigarettes, household appliances, etc.).
There are objective conditions for the formation of an oligopoly:
1. Scale effect. For effective work The industry needs the production capacity of each firm to occupy a large share of the total market. The scale effect is realized by reducing the number of producers and increasing the market share of each. Firms remaining in the industry have more advanced technologies and achieve economies of scale.
For example, in the US automotive market, out of 80 firms due to mergers, acquisitions and bankruptcies by the end of the 20th century. three firms remain (General Motors, Ford, Chrysler), which account for 90% of industry sales, are technologically more advanced and realize economies of scale.
2. The merger of several firms into one, larger, allows you to realize economies of scale and gives you more power in the market, increases sales, allows you to control not only the market for the finished product, but also raw materials, i.e. there is an opportunity to reduce production costs and get more profit. And this, in turn, helps create barriers to other firms and encourages more mergers. The highest degree of mergers - fusion - involves the complete interpenetration of merging firms ( railways, water power plants, automotive production).
Barriers to entry into the oligopolistic industry are: economies of scale; licenses, patents; ownership of raw materials; the amount of advertising expenses, etc.
Oligopoly occupies an intermediate position between monopoly and monopolistic competition, it differs significantly from them, is a more complex economic situation, due to the peculiarities of price changes. In perfect competition, the seller does not take into account the influence of other sellers and changes in consumer demand. Therefore, in a competitive market, prices change continuously depending on changes (fluctuations) in supply and demand. In a monopolistic industry, the monopolist takes into account only changes in consumer demand, and determines the price and volume himself.
In the conditions of an oligopoly, the situation changes: each oligopolist, in determining the strategy of his economic behavior must take into account the behavior of both consumers of its products and competitors who operate with it in the same market. Therefore, the central problem of oligopoly is that the firm must take into account the response to its actions from competing firms. This reaction is usually ambiguous and unpredictable. In an oligopolistic market, a new complicating factor emerges: interdependence. No oligopolist will change his firm's pricing policy until he has calculated the likely moves of other firms and the expected reaction of competitors. The scarcity that gives rise to universal interdependence is the unique property of an oligopoly. Therefore, the oligopolist must build his strategy of behavior in the market, taking into account not only his own goals, market data, but also the results of predicting the response behavior of competitors. With this in mind, firms in the oligopolistic market must make decisions about the volume of production, price, advertising, updating the assortment, etc. All this complicates the decision-making process.
The theoretical analysis of the firm's behavior in an oligopoly is also difficult. There is no general, universal theory of oligopoly, because:
- oligopoly is a variety of special market situations in a wide range (from rigid to vague oligopoly, with or without collusion). Different types of oligopolies do not fit into one model;
- the presence of interdependence leaves an imprint on the market situation: the oligopolist does not always correctly assess the actions of competitors, demand and marginal revenue, so it is difficult to determine the optimal price of products and production volume, the conditions for maximizing profits.
In economic theory, several models of oligopoly have been developed that describe specific economic situations. All models have common features. Let's consider the main ones.
Oligopoly models without collusion.
1. Cournot model. This is one of the first models of oligopoly in the form of a duopoly. Such a model is often implemented in regional markets and reflects all characteristics oligopolies with three, four or more participants (Fig. 7.16).
Rice. 7.16. Cournot model
In 1838, the French mathematician and economist O. Cournot proposed a duopoly model, which was based on three premises:
- there are only two firms in the industry;
- each firm perceives the volume of production as a given;
Both firms maximize profits.
Let us assume that the cost of producing a unit of a product does not depend on the volume of production and is the same for both manufacturers.
Therefore, MR1 = MC2; dd1 and dd2 are the demand lines for the products of the first and second producers, respectively.
O. Cournot divides the existence of a duopoly into several periods:
- in the initial period, only the first firm produces products, which means that a monopoly situation arises. The monopolist has a demand line dd1 and a marginal revenue line MR1. Aiming for the maximum profit (MR1 = MC1), the firm will choose the volume Q1 and the price P1;
- in the second period, the second firm (monopolist) will be connected to the first one and a duopoly will arise. The first firm will lose its monopoly position. The second firm, when entering the industry, will consider the price and output of the first firm as given, it will give a smaller output: its demand is characterized by the line dd2 and marginal revenue MR2. The volume of Q2 will be determined by the intersection of the lines MC2 and MR2, by the price of P2 (at the intersection with dd2). The price of the second firm is lower to entice consumers. In this situation, the first firm, in order not to give up its market niche, will be forced to sell its products at a price P1 = P2;
- in the third period, the active role will again pass to the first firm.
It will take Q2 as a given value and form new feature demand dd3. At the intersection of Q2 and MR1, we find point E, through which dd3 will pass parallel to the previous demand lines. Similarly, the process of production will develop in subsequent periods, it will alternately include one or the other duopolist.
O. Cournot proved that the market situation develops from monopoly to oligopoly. If the number of participants in the oligopoly grows and each of them strives to achieve a temporary gain, then there is a tendency to move from oligopoly to free competition. Under free competition, each firm will maximize profits at the volume when MR = MC = P. The development of an oligopoly in the direction of free competition is possible, but not necessary.
Such a transformation will result in an overall decrease in profits, although in the very process of moving from one market model to another, each of the producers may receive a temporary gain. The main emphasis in the Cournot model is placed on the strong interdependence of firms, the interdependence of their behavior. Each firm takes the situation for granted, to strengthen the market reduces the price and conquers a new market segment. Gradually, firms come to a section of the market that corresponds to the balance of their forces.
General conclusions from the Cournot model:
- in a duopoly, the volume of production is greater than in a monopoly, but less than in perfect competition;
The market price under a duopoly is lower than under a monopoly, but higher than under free competition.
2. Chamberlin model. E. Chamberlin in his work "The Theory of Monopolistic Competition" (1933) proved three theorems that reveal the types of behavior of oligopolists.
Theorem 1. If sellers do not take into account mutual dependence and believe that the competitor's supply will remain unchanged in any case, then as the number of sellers increases, the equilibrium price will decrease below the equilibrium monopoly price and reach a purely competitive level, when the number of sellers tends to infinity (Fig. 7.17).
Rice. 7.17. Chamberlin model
Take the demand line DD1, the market capacity will be equal to OD1. If the oligopoly is considered as a duopoly, then each seller is able to put on the market the second part of the market capacity OD1 (point E). If the first seller enters the market, then he sells all his products in the amount of OA, the monopoly price PE is set on the market. If industry costs are fixed, then given price will be monopoly. The profit of the first firm will be equal to the area of the OAEP rectangle (shaded area).
The second firm in the industry has a market capacity of AD1. From point E draw the line MR2 parallel to the line MR1. The price of the second firm will be equal to PC, profit - the area of the rectangle ABCF. As a result, the second competitor will increase sales in the market to the value of OB; the price will fall to PC, and at the same time, the profit of the first firm will decrease to a value equal to the area of \u200b\u200bthe OPCFA rectangle, therefore, the profit of the first firm will fall by half - from OPEEA to OPCFA. The position of the first firm has become suboptimal, the volume of sales is too large for the market that remains at its disposal. In order to get to the optimal point, he lowers the volume of sales to half the capacity of his market. At the same time, the second firm will expand its sales volume by half of the vacated market capacity, and the process will continue indefinitely.
Market share to be occupied by:
- the first seller: 1 - 1/2 - 1/8 - 1/32 = 1/3 OD1;
- second seller: 1/4 + 1/16 + 1/64 = 1/3 OD1.
Together they will provide two-thirds of OD1, therefore, the market will be saturated by two-thirds of its volume.
The share of each seller is 1 / (n + 1); n is the number of sellers.
Total revenue TR = n /(n + n); n > ¥.
When n > ¥, the saturation of the market tends to the value of its capacity OD1, and the price tends to zero.
Theorem 2. If each seller assumes that the price of his competitor remains unchanged, then the equilibrium price (if there is more than one seller) is equal to the purely competitive price:
- if each competitor assumes that the price of his rival will be unchanged, then he will reduce the price to a level lower than the price of the competitor, and will attract his buyers to his side;
- the first competitor will most likely do the same: he will lower the price compared to the competitor's price and attract buyers to him. Competitive price gouging will continue until they put all their products on the market and the price becomes competitive.
From the first two theorems, E. Chamberlin draws important conclusions:
- if one of the sellers keeps the size of his offer unchanged, then the second seller is able to undermine his price by his maneuvers;
- if the first seller keeps his price unchanged, then his sales volume becomes vulnerable.
Theorem 3. If sellers take into account their total influence on the price, then the price will be monopoly, it will be set at the level of PE and OA of products will be sold (see Fig. 7.17). Sellers adjust to each other in terms of sales volume. Proof: if the first competitor starts with sales volume OA, then the second one will produce volume AB; then the first competitor will halve the volume of sales and the total volume of OA will bring the monopoly price P. This price will be stable, because, retreating from it, any competitor causes damage not only to the rival, but also to himself. If the number of sellers increases, but they all take into account their indirect influence on other sellers, then the price will not decrease, and the volume of output will not increase. However, if there are a lot of producers and they do not take into account the interdependence from each other, then the price will begin to decline, and the sales volume will approach the maximum value of OD1.
If the number of sellers increases, then the price will become competitive, there will be a break point. In an oligopoly, prices change infrequently, usually at regular intervals and by a significant amount. Such "fixed" prices occur when firms face cyclical or seasonal fluctuations in demand, which are taken into account in pricing. Oligopolists usually do not change the price of goods, but react to changes in demand by lowering or increasing output. This is the most beneficial, because. price changes are associated with significant costs (changes in price lists, costs of notifying customers, loss of customer confidence).
Notes on theorems:
1. Many antimonopoly laws provide for sanctions in case of collusion of oligopolists, as well as if they, without collusion, pursue a policy that the court recognizes as monopolistic.
2. Theorems 1–3 are proved on the assumption that the mutual adaptation of competitors occurs instantly. But if there is a time gap between the action and the reaction (the act of adaptation), then the seller, who was the first to break the balance, receives advantages over other sellers as a result of a price reduction. The competitor's assessment of this advantage is usually proportional to the period during which he intends to be in the market.
If in an oligopolistic industry there is a general interdependence between firms, but there is no collusion, then the location and shape of the demand curve for these products will have a specific form.
3. Model of a broken demand curve for oligopoly products.
At the beginning of the twentieth century. The attention of theoretical economists was attracted by the fact that prices in some oligopolistic markets remain stable for a long time. For example, in the United States, the price of railroad tracks has not changed for decades, although both demand and costs have changed.
To explain this situation, a model of a broken line of demand for the products of an oligopolist was proposed. Competitive firms can equalize their prices following the changes of the first firm, or they can ignore its actions, do not pay attention to them.
Suppose that one of the oligopolists at some point has a certain demand and price corresponding to point E (Fig. 7.18). Point E is given, but this model does not explain how this combination of volume and price has developed. The demand line DD1 is relatively inelastic; An oligopolist is risk averse, he will only take risks when a change in price gives him a big win.
Rice. 7.18. Broken demand curve for oligopoly products
An analysis of the oligopoly's activity shows that price cuts will be evened out, because competitive firms will try to prevent the price-cutting oligopolist from taking customers away from them. At the same time, a similar price increase will not follow after the oligopolist, because the competitors of the firm that raises the price will try to win back the confidence of the buyers lost as a result of the price increase.
The oligopolist's reasoning goes like this:
– if I lower the price, then my competitors, expecting a reduction in their sales, will do the same, so few will benefit from the price reduction, because. demand line DD1 has a steep slope;
- if I raise the price, but competitors do not do this, then the company will lose customers, the elasticity of demand will increase and the demand curve will become flatter - the NOT line. The line DE will take position NOT and as a result the demand line will become HED1.
Thus, the demand line in the subjective perception of a risk-averse oligopolist has a break at point E. The segment NOT of the demand curve will characterize the situation when competitors “ignore” price increases; and the segment ED1 will characterize the situation when competitors "follow the example" and reduce prices. A kink in the HED1 demand line means there is a gap, so the oligopolist faces a "broken demand curve". Above the current price, the curve is highly elastic (NOT); in the section below the current price (ED1), the curve is less elastic or inelastic. A break in the demand line means a gap in the marginal revenue line MR, which is also represented by a broken line and consists of two segments - HL and SK. Because of the sharp differences in the elasticity of demand above and below the current price point, there is a gap that can be seen as a vertical segment LS in the marginal revenue curve, hence MR = HLSK.
It is important that MR = MS. Let the marginal cost line initially occupy position MC1 (at QE and PE). If commodity prices rise, then the costs of the oligopolist will increase and the MC1 curve will go up and move to MC2 (for this position, the combination of output and price will be the same). The oligopolist decides to change the price when the intersection point of MR and MC3 is outside the vertical section (to the left of point E) of the MR line. This corresponds to the curve MC3 in the figure for the volume Q3. With a slight change in costs or demand, the oligopolist will not change the price.
The considered model serves to explain the relative price stability in oligopolistic markets in the presence of inflation:
- a broken demand curve shows that any change in price will lead to the worst: if profits increase, buyers will leave, if profits fall, then costs may exceed the growth in gross income. In addition, a “price war” may arise: competing firms will further reduce the price and there will be a loss of buyers;
- a broken curve of marginal revenue MR means that, within certain limits, significant changes in costs (from S to L) will not have any effect on the values of Q and P.
This explains why an oligopoly that does not have collusion prudently does not change prices in leaps and bounds, making them inflexible.
Keeping prices at the same level is effective only in the short term, it is unacceptable for the long term.
Oligopoly in the short run. The ability to hold prices in the short term is inherent in the very behavior of oligopolistic firms: by planning production, they prepare it in advance for an increase or decrease in demand. Usually, the oligopolist has a special (saucer-shaped) AVC curve (Fig. 7.19): on the interval (Q1 - Q2) AVC \u003d MS \u003d const.
Rice. 7.19. Oligopoly in short
Usually, based on market research, firms determine their "normal" demand curve (DDH), which reflects how much of the product, on average, they can sell on the market at each price. Knowing the potential demand, the firm installs the equipment, determines the "normal" price from the "normal" demand curve. Since the maximum profit is at the point corresponding to MR = MC, and MC coincides with AVC, the intersection of MR = AVC (point A) is most beneficial for the oligopolist. In the case of demand fluctuations around DDH within the Q1 - Q2 section, we obtain demand lines D1 and D2; while the price remains "normal" and unchanged, and the volume of production varies from Q1 to Q2. It should be noted that holding prices is advisable if, with certain output volumes, it is possible to keep AVC constant; if the firm will have a classical AVC parabola (without a flat area), then attempts to hold the price and the fall in output with a decrease in demand will lead to losses.
Oligopoly in the long run has not yet received a theoretical description, because. it is necessary to know the response of competitors to a possible price change. Since their actions are not determinable, scientists have not yet succeeded in creating a unified theory of the behavior of an oligopolistic firm in the long run.
4. Model of game theory.
Game theory was proposed by J. Neumann and O. Morgenstern (1944). Its application to the analysis of oligopoly is very fruitful. Game theory considers the behavior of firms in the market as a game in which all participants make decisions in accordance with certain rules. When making decisions, the participants in the game do not know exactly what strategy the opponent will choose. The result for the participant depends on the reliability of forecasts in the game - prizes (profit) or fines (losses). An analogue of the game situation in the oligopolistic market is the so-called "prisoner's dilemma".
Matrix of prizes and fines for two prisoners in one case:
Let's assume that the prisoners cannot come to an agreement and choose the best position - not to confess and receive one year of probation on the basis of circumstantial evidence. How should the first (A) behave if he does not know the reaction of the second (B)?
There are behavioral strategies: max-min and max-max.
The max-min strategy characterizes a pessimistic outlook on life, when A believes that B will do the worst (shift all the blame on A). The worst option for A is that A does not confess, but B "squeals".
To avoid this and secure a less bad result for himself, A confesses ("knocks"). If B does not confess at the same time, then A has freedom, and B goes to prison for a full term. If B argues in the same way, then it will be more profitable for him to confess. If both accept guilt, then the term from ten (potential years) is reduced to five years for each. Without agreeing, smart prisoners admit their guilt (less bad result than a term of ten years).
The max-max strategy attracts optimists. Prisoner A thinks it's better to be free or to go to jail for less time. He confesses, expecting the other to not confess. If B does the same, then both repent of their deeds (a period of five years). The players made the same decisions and ended up in the lower right corner of the matrix. This outcome is called the Nash decision or the Nash equilibrium. The conditions for this equilibrium are as follows: if the strategy of the first player is given, then the second player has only to repeat the move of the first, and vice versa. A similar decision-making choice arises in the market when oligopolistic firms decide whether to cut prices or not, to advertise or not, and so on.
The strategy of two firms:
If firms A and B advertise the product, then the profit will be 50 units each, if one of them advertises and the other does not, then the advertising firm gains a competitive advantage and increases profits to 75 units, while the other will suffer losses (-25 units). If both firms have advertising, then the profit will be 10 units. (because advertising itself is expensive and the overall effect is lower by the amount of costs).
The pessimistic approach is to look for the best option from the bad ones. The firm compares the numbers 10 and -25 and chooses advertising with all its costs (not to win, but not to lose!). The optimistic approach is the search for the best option of all possible. It is better to get 75 units. profits, they are compared with 50 units. and select ads. The advertising war is a zero-sum war.
5. Model of competitive markets.
The initial premise of this model is the assumption that entering and exiting an industry costs nothing. In fact, the creation of a company and its liquidation are associated with significant difficulties (costs). If in theory the absence of barriers is recognized, then the threat of intrusion by competitors becomes real. Large oligopolists may lose their market power. The threat of competition acts on the oligopoly in such a way that there is a desire to reduce the overall level of costs, the price level, to increase the volume of production. This leads to a decrease in economic profit and the preservation of only normal (accounting) profit.
6. Model of collusion.
Under conditions of perfect or monopolistic competition, there are many firms that cannot come to an agreement and lead competition among themselves (in the form of price and non-price competition). There are few firms in an oligopolistic industry, and they can always agree on a joint strategy and tactics, on prices, on the division of the market. Firms collude to determine the optimal share of each participant in industry production. At the same time, the market develops according to the type of monopoly and the total volume of industry profit increases due to rising prices and a decrease in production volume (compared to the market of perfect competition).
Consider how price P and volume Q are determined by collusion (Figure 7.20).
Assume that all firms in an industry produce homogeneous products, have the same cost curves, and equalize their prices. Assume that the demand curves of all firms are the same. Under collusive conditions, it becomes profitable for each firm to equalize the price and get the maximum profit (the area shaded by KREM) with the volume QE. For society, the result of collusion will be the same as if the industry were monopolized.
Rice. 7.20. collusive oligopoly model
An agreement can take many forms, the simplest of which is a cartel (a written agreement on prices and output). Researchers of market structures evaluate cartel agreements ambiguously, referring them to an oligopoly or a monopoly. From the standpoint of antimonopoly law, the attitude towards the cartel is also ambiguous. In a number of countries, collusion over prices and quotas is prohibited. But at the international level, such well-known cartels as OPEC (Organization of Petroleum Exporting Countries) successfully operate. His activities had a significant impact on the oil market in 1970–1990. (by reducing the volume and increasing the price). There is also another oil cartel, called the "Seven Sisters" - a set of five American oil companies, one British and one Anglo-Dutch company. The German cartel AEG operates in the electrical equipment industry.
For a cartel agreement to be stable, a number of conditions must be met:
- the demand for the cartel's products should be price inelastic, and the product itself should not have close substitutes;
- all cartel members must follow certain rules of the game.
The company that violates the terms receives competitive advantages but loses relationships with partners.
At present, the importance of price competition has decreased; antitrust laws became more stringent, so the importance of the cartel in its classical form decreased. Modern cartels do not touch upon the issues of prices and volumes in the agreement, but deal with the conditions for the joint implementation of large-scale investment projects sharing equipment. Legal cartels gravitate more and more towards conspiracy.
7. Model of conspiracy.
A collusive oligopoly occurs when firms reach an explicit or tacit (implicit) agreement to fix prices, divide or allocate markets. Collusion eliminates uncertainty, prevents price wars, and erects barriers to entry of new competitors into the industry.
According to P. Samuelson and J. Galbraith, modern firms do not need to enter into open contracts. A well-established information service allows you to keep abreast of the affairs of companies in the industry, know their capabilities, goals, interests, and, based on this information, develop a strategy that is beneficial to everyone.
There are several forms of collusion.
Price leadership model. This situation is typical for a vague oligopoly, when one of the largest firms stands out among a large number of firms, which plays the role of a clear leader. The leader determines the pricing policy, which is supported by all other firms in the industry. The leader sets the price in such a way that it serves the interests of all firms, even those whose costs are high. In such a situation, the leader receives superprofits. If the leader lowers the price, then small firms cannot compete and leave the market. After that, the leader raises the price and expands its market niche.
The leadership position can move from one firm to another. A kind of leadership in general is the barometer firm model. This position is claimed by a firm that does not dominate in terms of production, but has a certain prestige in the industry. Her behavior, incl. price, is a benchmark for other oligopolistic firms.
Rule of thumb model. When there is no clear price leader, firms can follow simple rules of thumb in pricing.
The first rule is pricing based on average AS costs.
In practice, a certain value is added to the AC (for example, 10%), which will be the profit of the oligopolist. The price of the product will be determined according to the “cost plus” rule, i.e. average cost plus profit margin. With a change in the AC value, the price automatically changes.
The second rule is the establishment of some customary price levels (for example, 19.99; 39.95...). Price steps are widely used, but traditional prices are used as steps. This practice is used in sales.
Models of collusion exist in the form of so-called "gentlemen's agreements", when the parameters of the agreement (collision) are not fixed anywhere, they are formed at the level of an oral agreement.
Only in this form can it act as a secret treaty. At the same time, collusion in an oligopolistic market is unstable, because there are objective conditions conducive to its violation.
Barriers to conspiracy:
1. Differences in demand and costs. It is very difficult to reach an agreement on price when the oligopolists have large differences in demand and costs. In this case, firms will maximize profits at different prices, and a single price will be unacceptable for all firms; therefore, it is very difficult to come to an agreement, it will infringe on someone's interests.
2. Number of firms. The more firms in an oligopolistic industry, the more difficult it is for them to reach an agreement; this is especially difficult for a "vague" oligopoly, where the competitive margin will not agree to a secret price agreement due to the large number of firms and the insignificant sales volumes of each manufacturer.
3. Fraud. Each firm in an oligopolistic industry seeks to gain temporary advantages, for which attempts are made to covertly (if there is collusion) lower prices and attract buyers from other firms. The result of this fraud is the sale of additional units of products on the basis of price discrimination. For this additional output, MR = P, and the firm will be profitable up to the point where P = MC. However, covert price discounts can become overt; fraud will come out and lead to a price war between the oligopolists. Therefore, the use of secret price discounts is an obstacle to collusion.
4. Recession business activity in an industry encourages firms to respond to shrinking demand by lowering prices and attracting additional buyers at the expense of competitors to increase their own profits and improve the efficiency of their production capacities. Firms' attempts to stay afloat in a downturn in this way usually destroy collusion.
5. The possibility of other firms entering the industry will become more attractive, because prices and profits rise under conditions of collusion. However, attracting other firms to the industry will cause an increase in the market supply, will have a downward effect on prices and profits. If blocking entry into an oligopolistic industry is unreliable, then collusion will not last long and prices will fall.
6. Legal Obstacles: The antitrust laws of a number of countries prohibit conspiracies and prosecute them. However, secret agreements are made orally in an informal setting. They fix the price of the product, the quotas of sellers, which is expressed in non-price competition. Such agreements are difficult to detect and apply the law to them.
The special position of the oligopoly in the competitive market structure between pure monopoly and pure competition determines the specifics of oligopolistic competition. As all the considered models of oligopoly show, with a given market structure there are no allocative and production efficiency (P > MC and P > AC). The degree of restriction of competition and monopolization of the market is high. Oligopolistic barriers make it difficult for capital to flow. The role of the oligopoly in scientific and technological progress is also ambiguous: on the one hand, a high level of industrial competition acts as an engine technical progress, provides more funding for R&D, application high technology. On the other hand, there is an inefficient use of resources. In general, oligopolies characterize a very important structural unit of a market economy.
7.5. MONOPOLISTIC COMPETITION
Monopolistic competition is a common type of market, it is an intermediate market model between oligopoly and perfect competition. Monopolistic competition is a market in which many firms sell a differentiated product, access to which is relatively free, and each firm has some control over the selling price of its product in the face of significant non-price competition.
The main features of the market of monopolistic competition are the following:
- there are a large number of small firms in the market;
- an individual firm offers on the market an insignificant (compared to the industry) volume of products;
firms produce a variety of (differentiated) products;
- the demand for the products of a monopolistic competitor is not perfectly elastic, but its elasticity is quite high;
- although the product of each company is somewhat specific, the consumer can easily find substitute products and switch his demand to them;
– little ability to influence or control the price;
- there are practically no barriers to the inflow of new capital, so the entry of new firms into the industry is not difficult, does not require significant initial capital investments;
- the level of market competition is quite high;
A characteristic feature of the firm in conditions of monopolistic competition is the specificity of the product. There are many substitute products (substitutes) for the firm's product, but product differentiation (real or imaginary) under monopolistic competition makes it actually unique. An example of markets for monopolistic competition are the markets for clothing, footwear, cosmetics, alcoholic and non-alcoholic beverages, coffee, medicines etc. Through a wide (often aggressive) advertising, the manufacturer brings to consumers information about the benefits of their product. Patenting trademarks, industrial brands, etc. allows you to consolidate the advantages and uniqueness of the product, which gives the company the opportunity to influence prices and gives it some features of a monopoly.
In the short run, behavior is monopolistic competitive firm similar to the behavior of a monopoly, but there are some differences from other market structures. Compared to a purely competitive firm, a monopolistic competitor has a higher price and a smaller volume, compared to a monopoly - on the contrary. The demand curve for a monopolistic competitor's product is less elastic than the demand curve for a perfect competitor, but more elastic than the monopolist's or the industry's demand curve. The demand curve for a monopolistic competitor's product is less elastic than the demand curve for a perfect competitor, but more elastic than the monopolist's or the industry's demand curve. Price control allows a monopolistic competitor to increase the price of a product without losing demand for it in the face of regular customers. To attract additional customers and increase sales, the firm needs to lower the price. In this regard, the marginal revenue of the firm of a monopolistic competitor is not equal to the price, and the marginal revenue line is located below the demand line.
The firm chooses a combination of demand and price that allows it to maximize profits, provided that MR = MC (Fig. 7.21).
Rice. 7.21. The equilibrium of a monopolistically competitive firm
If the demand for products is insufficient, then losses are possible (Fig. 7.22).
Rice. 7.22. The firm is a monopolistic competitor
in a loss situation
The area of the PMMAPA rectangle quantifies the amount of loss. If the price is above average variable costs, then the firm will be able to minimize losses by producing output in the amount at which MR = MC. If the price does not cover average variable costs, then the firm should stop production.
The behavior of the firm in the long run becomes somewhat more complicated, since the barriers are low and entry is practically free. The presence of economic profit creates an attraction for new firms that want to start their own production. The equilibrium price is set at the level of average cost, so the firm loses economic profit and earns only normal profit in the long run.
Under conditions of monopolistic competition, production efficiency and the efficiency of distribution (allocation) of resources are not achieved. A monopolistic competitor underproduces and overprices a competitive firm. Especially many complaints are made against excessive and annoying advertising, which is an integral part in all their diversity, leads to an increase in the standard of living of the population. Differentiation of the product allows to improve its quality and increase production efficiency.
BASIC CONCEPTS AND TERMS
Competition, competition as a process, competition as a situation, functions of competition, the “five forces of competition” model, functional competition, generic competition, intercompany competition, intra-industry and inter-industry competition, perfect and imperfect competition, price and non-price competition, unfair competition, sectoral market structure, quasi-competitive market, pure competition, profit maximization condition for a competitive firm, allocative efficiency, pure monopoly, natural monopoly, artificial monopoly, state monopoly, monopsony, discriminatory monopoly, bilateral monopoly, oligopoly, duopoly, oligopsony, monopolistic competition with product differentiation, barrier to entry into an industry, concentration and centralization of production and capital, price discrimination, antitrust laws, mergers and cartel.
29MarWhat is Oligopoly
Oligopoly is a market structure or model in which there are a small number of sellers in a market for homogeneous or differentiated products. It is important to note that only a structure that has more than two sellers can be considered a pure oligopoly.
What is OLIGOPOLY - definition in simple words.
In simple terms, oligopoly is a situation where there are a small number of large firms in the market for certain goods or services that occupy a large part of the market share. Most often, oligopolies can be observed in financially expensive and technological areas, such as metallurgical, oil and gas industry, railways, shipbuilding, aircraft building, high-tech industries.
Speaking of oligopoly, it should be noted some connection with the more common well-known term -. In fact, these are quite similar concepts, although they have some differences.
- Monopoly- this is when one company or controls the market;
- Duopoly- this is when there are only 2 large players in the market;
- Oligopoly- this is when there are more than 2 influential sellers of services or goods on the market.
It should be noted that quite often the term "oligopoly" is also applied to duopoly models, since, in fact, a duopoly is a special case of an oligopoly.
Oligopoly examples.
IN modern world there are many examples of oligopolies, and many of them are familiar to almost everyone. So, for example, in the markets of certain countries there is a small number oil companies. This can be observed in the markets for the production of cement, steel, pesticides and so on.
If you turn to the automotive market in a certain region, for example, in Germany, then it can be noted that Daimler AG concerns occupy the main market share there ( mercedes benz), BMW AG and Volkswagen AG.
A great example of a duopoly would be desktop and laptop microprocessor manufacturers, namely Intel and AMD. In fact, it is these 2 manufacturers that divide the entire processor market.
oligopoly market. conditions for the emergence of an oligopoly.
Oligopolies often arise naturally as companies grow and begin to capture more and more market share, gradually ousting or absorbing competitors. Over time, the number of companies offering certain products and services begins to dwindle to a few large corporations. Customers, in turn, when choosing products, tend to trust more eminent and reputable brands.
In the formed oligopoly, the dominant companies feel quite free and can afford to completely control pricing. For example, many manufacturing companies mobile phones, significantly inflate the price of their products just because they are popular and can afford it.
Another factor in the influence of dominant companies on the market as a whole is the relationship with competitors. So, for example, when a company cuts prices or introduces new services or products, competitors should follow suit. Otherwise, if they do not provide buyers with an alternative, they may lose those buyers altogether.
If we talk about the positive and negative aspects of the oligopoly as a structure, then it should be noted that there are both significant pluses and minuses. The advantages include the fact that large companies quite strongly compete with each other, which stimulates the growth of product quality and scientific and technological progress in general. However, such competition, combined with the huge opportunities of large firms, can significantly limit the emergence of new players in a particular product or service market.
Oligopoly is a market structure in which very few (oligo) sellers dominate the sale of a product, and the emergence of new sellers is difficult or impossible.
The product of different sellers can be both standardized (for example, aluminum) and differentiated (for example, cars).
Typically, such markets are dominated by 2 to 10 firms, which account for 50% or more of total product sales. For example, the 8 largest US firms producing photographic equipment account for more than 85% of output. This market is dominated by Kodak.
Oligopolistic markets have the following features:
- - a small number of firms and a large number of buyers. This means that the market supply is in the hands of a few large firms that sell the product to many small buyers;
- - differentiated or standardized products. In theory, it is more convenient to consider a homogeneous oligopoly, but if the industry produces differentiated products and there are many substitute products, then this set of substitutes can be analyzed as a homogeneous aggregated product.
- - the presence of significant barriers to entry into the market, i.e. large barriers to entry into the market as in a pure monopoly market: scale of production, patents, licenses, etc.
- - firms in the industry have and are aware (unlike monopolistic competition) of their interdependence, so price control is limited. Only firms with large shares in total sales can influence the price of a product.
The measure of dominance in the market by one or more large firms is determined by the concentration ratio (the percentage of sales of the four largest firms to the total industry output) and the Herfindahl-Hirschman index, which is calculated by summing the results obtained by squaring the percentage market shares of the firm selling products in this market:
HHI = S21 + S22 + S23 + ... S2N,
Where S1 is the market share of the firm providing the largest volume of supplies; S2 is the market share of the next largest supplier, and so on.
Oligopoly is the predominant form of modern market structure. The reasons for its appearance and existence are largely determined by the level of development modern production, which is based on the use of NTR. Their use and implementation is costly and pays off largely due to the achievement of a positive effect of scale growth and lower production costs (costs). On the one hand, this serves as a barrier to new firms entering the industry, and on the other hand, such costs can only be recouped by a significant share of the firm in total market sales.
The behavior of firms in oligopolistic markets is likened to the behavior of armies in war. Firms are rivals, and the trophy is profit. Their weapons are price controls, advertising, and output. That is, in an oligopoly, sellers are aware of their interdependence and must reckon with the reaction of their competitors to increase or decrease prices. At the same time, the reaction that the seller expects from his competitors is the main factor determining his decision on the price of the goods and the volume of output. This reaction largely determines the equilibrium in the oligopolistic market and the nature of the model, which can explain the firm's behavior in specific situations.
The action of competing firms is an additional constraint that firms must take into account when determining optimal price and output. Not only costs and demand, but also the response of competitors, determine decision making. Therefore, the oligopoly model should reflect all three of these points.
Thus, in an oligopoly, both price and non-price competition is possible. But price competition methods are usually less effective, so non-price competition methods - from advertising to economic espionage - are more effective and used more often.
The complexity and diversity of the oligopolistic market has not allowed economists to develop a single oligopoly model, and for this reason there are several oligopoly models.
1) The content of the first model is price wars, which are a cycle of successive price reductions by firms competing in an oligopolistic market. It is one of the many possible consequences of oligopolistic rivalry. Price wars are good for consumers, but bad for sellers' profits. Wars continue until the price falls to the level of total average cost equal to marginal cost and sellers in equilibrium charge the same price as in perfect competition:
This equality is called the Bertrand equilibrium. It assumes that firms compete by cutting prices while output remains constant. Price falls until it equals marginal cost.
The total market output is the same as under perfect competition. Equilibrium exists when no firm can any longer benefit from lower prices, i.e. price is equal to average cost, and economic profits are equal to zero. Price drop below this level will result in losses. At the same time, each firm proceeds from the fact that if other firms do not change their price, then it also has no incentive to raise the price. Unfortunately for buyers, price wars tend to be short-lived. Oligopolistic firms, after some time, enter into cooperation with each other in order to avoid wars in the long term and, consequently, undesirable effects on profits.
2) An oligopoly model based on collusion. As you know, in an oligopoly, each firm has a choice: between non-cooperative (non-cooperative) and cooperative (cooperative) behavior. In the case of non-cooperative behavior, firms are not bound in their behavior by any explicit or secret agreements with each other. It is this strategy that generates price wars. Firms come to cooperative behavior if they intend to reduce mutual competition. If, in an oligopoly, firms actively and closely cooperate with each other, this means that they collude. This concept is used when two or more firms have jointly fixed prices or outputs and divided the market or decided to do business together. Collusion is a generic concept in relation to a cartel, a trust.
A cartel is a group of firms that act together and agree on output and price decisions as if they were a single monopoly.
Most developed countries world cartels are prohibited by law. However, firms often succumb to the temptation to collude, which provides an opportunity to insulate themselves from competition without resorting to an open agreement. The benefits of collusion, if successful, can be enormous. The main problem faced by the cartel is the problem of coordinating decisions between member firms and establishing a system of restrictions (quotas) for these firms.
To form a cartel, you need the following:
- - make sure that there is a barrier to entry in the industry to prevent other firms from selling the product after the price rises;
- - organize a meeting of all manufacturers of this product in order to establish a joint benchmark for the overall level of output;
- - set quotas for each member of the cartel;
- - Establish a procedure for holding approved quotas.
Cartels impose fines on those who do not comply with the agreement by exceeding quotas. Cartels face a challenge in making monopoly price and output decisions. Firms with higher average costs achieve higher cartel prices. There are disagreements regarding the division of the territory.
In modern conditions, cartels exist in more flexible and quite diverse forms: patent pools, licensing agreements, consortiums to implement scientific developments. Cartels are classified into four main categories.
Cartels are formed to:
- - control of sales conditions;
- - setting prices;
- - separation of activities, territories, sales and consumers;
- - Establishing a stake in a particular business area.
There are two main types of cartels:
cartels pursuing the goal of maximizing the total, or industry profits;
cartels that set as their goal the distribution and fixation of market shares or regulate the demarcation of the market.
- 3) The third oligopoly model reflects the firm's response to price changes by competitors. It is called the curved (broken) demand curve model and also assumes price firmness. This model was proposed in 1939 by the Americans R. Hall, K. Hitch and P. Sweezy.
- 4) The fourth model of oligopoly is price leadership. It explains why firms often follow the pricing policy of the firm that acts as the leader in bidding.
The leading firm assumes that other firms in the market will not react in a way that will change the price it has set. They will decide to maximize their profits at the price set by the leader. In fact, these firms begin to accept the price set by the leader as given.
- 5) The fifth cost-plus-profit model shows that firms often set prices for their products simply by adding the industry average rate of return to their costs. Or the oligopolist may use a formula, a technique to determine unit cost, and add a markup to the cost to determine the price. This pricing has particular advantages for multi-product firms that would otherwise face the difficult and costly process of estimating demand and cost conditions for hundreds of different products and services.
- 6) The sixth model, which is called pricing, restricting entry into the industry. It shows how firms can set prices so as not to maximize current profits, but to maximize profits in the long run by preventing new competing sellers from entering the market.
To do this, firms either collude or follow the example of other firms in setting prices that could prevent entry into the market of "foreigners". To achieve this goal, they estimate the lowest possible average cost of any new potential producer and may price the product below the LATC minimum potential producers. This is a powerful barrier that limits the entry of new firms into the industry.
7) The seventh model of oligopoly is a model based on game theory. So, when determining its own strategy, the company evaluates the probable profits and losses. Which will depend on what strategy the competitor chooses.
Suppose firm A and B control the majority of sales in the market. Each of them seeks to increase sales and thereby ensure profit growth. The result can be achieved by lowering prices and attracting additional buyers, intensifying advertising activities, etc.
However, the result for each firm depends on the reaction of the competitor. If firm A starts cutting prices and firm B follows, neither firm will increase its market share and their profits will decline. However, if firm A lowers prices and firm B does not do the same, then firm A's profits will increase. In developing its pricing strategy, firm A considers possible responses from firm B.
If firm A decides to lower the price, and firm B follows it, firm A's profits will be reduced by 1,000 thousand rubles. If firm A lowers the price. Firm B does not do the same, then the profits of firm A will increase by 1,500 thousand rubles. If firm A does not take any steps in the field of prices, and firm B lowers its prices, firm A's profits will be reduced by 15,000 thousand rubles. If both firms leave prices unchanged, their profits will not change.
monopolistic competition market
Properties of an oligopoly
- Market dominance by a small number of sellers oligopolists
- Very high barriers to entry into the industry
- An oligopolistic firm does not need to produce differentiated products to survive in the long run.
- The decision of each firm affects the situation on the market, and at the same time depends on the decisions of other firms: when making a decision, the oligopolistic firm takes into account the possible reaction of other market participants. For this reason, in an oligopolistic market, the possibility of collusion is very high.
- A small number of goods-substitutes for the products of oligopolists
- An oligopolist can be both a price maker and a price taker in the market
- As a quantitative description of this form, the following ratio can be used - the share of the four leading firms in the industry should be more than 40%.
Universal Interdependence
Since there are few firms in the market, sellers need to develop growth strategies for their firm so that they are not forced out of the market by competitors. Since there are few firms in the market, companies closely monitor the actions of competitors, including their pricing policy, with whom they cooperate, etc.
Broken demand curve model: point P(none) - if the firm sets the price of the product above this level, then competitors will not follow it
Price policy
The pricing policy of an oligopolistic company plays a huge role in her life. As a rule, it is not profitable for a firm to increase the prices of its goods and services, since it is likely that other firms will not follow the first one, and consumers will "pass" to a rival company. If the company lowers the prices of its products, then in order not to lose customers, competitors usually follow the company that lowered prices, also reducing the prices of the goods they offer: there is a “race for the leader”. Thus, so-called price wars often occur between oligopolists, in which firms set a price for their products that is no higher than that of a leading competitor. Price wars are often detrimental to companies, especially those that compete with more powerful and larger firms.
Cooperation with other companies
Some oligopolists act according to the principle "don't have a hundred rubles, but have a hundred friends." Thus, firms enter into partnerships with competitors such as alliances, mergers, conspiracies, cartels. For example, the air transportation oligopolist, Aeroflot, in 2006 entered into the Sky Team alliance with other global airlines, the oil-producing countries united in OPEC, often recognized as a cartel. An example of a merger between two companies is the merger of Air France and KLM. By uniting, firms become more powerful in the market, which allows them to increase output, change the price of their goods more freely and maximize their profits.
Game theory
Theories of oligopolistic pricing
To model the behavior of firms participating in the market in the theory of oligopoly, methods of game theory are used. The most famous oligopoly models are:
- Gutenberg model
- Edgeworth model
Organizational and economic forms of concentration
- Cartel - a form of association, a public or tacit agreement between a group of enterprises with similar profiles on sales volumes, prices and markets;
- Syndicate - a form of association of enterprises producing homogeneous products, organizes collective sales through a single trading network;
- A trust is a form of association in which the participants lose their production and financial independence.
- Consortium - a temporary association of enterprises on the basis of a common agreement for the implementation of a project;
- A conglomerate is an association of diversified firms. A high degree of autonomy and decentralization of management is usually maintained;
- Holding - a parent company that controls the activities of other companies, may not be engaged in production activities;
- A concern is an association of enterprises bound by common interests.
In the vast majority of countries in the world, the processes of business combinations are controlled by antitrust laws.
see also
Notes
Links
- BRANCHES OF IMPERFECT COMPETITION - 2.6 Oligopoly and its characteristics
Literature
- Nureev R. M., "Course of Microeconomics", ed. "Norma", 2005
- F. Musgrave, E. Kacapyr; Barron's AP Micro/Macroeconomics
Wikimedia Foundation. 2010 .
- Ten key values of the Green Party
- ActionScript
See what "Oligopoly" is in other dictionaries:
oligopoly- a market situation in which a small number of fairly large sellers opposes a mass of relatively small buyers, and each seller accounts for a significant part of the total supply on the market. Dictionary financial terms.… … Financial vocabulary
Oligopoly- (oligopoly) A market in which a relatively small number of sellers serve many buyers. Every seller is aware that he can control his prices up to a certain level and that his profits will be affected by the behavior of his competitors... Glossary of business terms
oligopoly- (oligopoly) A situation in the market where there are several sellers, each of which evaluates the behavior of others. Each firm controls a fairly significant portion of the market, given the individual reaction of other market participants to reduce their ... ... Economic dictionary
oligopoly- [Dictionary of foreign words of the Russian language
oligopoly- The state of the commodity market, in which a very limited number of operators, as a rule, large corporations, operate on it. Automotive markets are almost oligopolistic in all countries, since the number of car manufacturers is very ... ... Technical Translator's Handbook
oligopoly- (from oligo ... and the Greek poleo I sell, trade), a type of market structure of the economy, in which several large firms, companies provide the overwhelming share of industry production and marketing of products ... Modern Encyclopedia
oligopoly- (from oligo ... and Greek poleo I sell I trade), a term denoting a market situation when several large competing firms monopolize the production and marketing of the bulk of products in the industry ... Big Encyclopedic Dictionary
oligopoly- (from Greek oligos small and poleo I sell) eng. oligopoly; German Oligopol. A type of market structure in which a few large competing firms monopolize the sale of the bulk of products in a given industry. see MONOPOLY. Antinazi. Encyclopedia ... Encyclopedia of Sociology
oligopoly- (oligopoly) A market in which there are few sellers, as a result of which they can control the prices and quality of the goods offered through collusion or a game-theoretic strategy. Most political markets, such as where political parties... ... Political science. Dictionary.
Oligopoly- the situation on the market (market structure), when a small number of product sellers (firms) operate. Its peculiarity is that here each of the competing firms is able to influence the price of products offered by other firms, and ... ... Economic and Mathematical Dictionary
The term oligopoly comes from the Greek words oligos (several) and poleo (sell).
Fundamental due to the small number of firms on the market are their special relationship, manifested in close interdependence and sharp rivalry between. In contrast to or pure monopoly, in an oligopoly, the activity of any of the firms causes a mandatory response from competitors. This interdependence of the actions and behavior of a few firms is key characteristic of an oligopoly and applies to all areas of competition: price, sales volume, market share, investment and innovative activity, sales promotion strategy, after-sales services, etc.
We have already mentioned coefficient of volume, or quantitative, cross elasticity of demand, which serves to quantify the interdependence of firms in the market. This coefficient shows the degree of quantitative change in the price of firm X with a change in the firm's output Y on 1% .
If bulk cross elasticity demand is equal to or close to zero (as is the case under perfect competition and under pure monopoly), then an individual producer can ignore the reaction of competitors to his actions. Conversely, the higher the elasticity coefficient, the closer the interdependence between firms in the market. Under oligopoly Eq>0, however, its exact value depends on the specifics of the industry in question and specific market conditions.
Homogeneity or differentiation of the product
The type of product produced by an oligopoly can be either homogeneous or diversified.
- If consumers do not have a particular preference for any brand, if all products of the industry are perfect substitutes, then the industry is called a pure or homogeneous oligopoly. The most typical examples of practically homogeneous products are cement, steel, aluminium, copper, lead, newsprint, and viscose.
- If the goods are branded and are not perfect substitutes (and the difference between the goods may be as real (according to technical specifications, design, workmanship, services provided), and imaginary (brand name, packaging, advertising), then the products are considered differentiated, and the industry is called a differentiated oligopoly. Examples are the markets for cars, computers, televisions, cigarettes, toothpaste, soft drinks, beer.
Degree of influence on market prices
The extent of the firm's influence on market prices, or its monopoly power, is high, although not to the same extent as in a pure monopoly.
Bargaining power is determined the relative excess of a firm's market price over its marginal cost(under perfect competition P=MS), or
L=(P-MC)/P.
The quantitative value of this coefficient (Lerner coefficient) for the oligopolistic market is greater than for perfect and monopolistic competition, but less than for pure monopoly, i.e. fluctuates within 0
barriers
Market entry for new firms is difficult but possible.
When considering this characteristic, it is necessary to distinguish between the already established, slow growing markets and young, dynamically developing markets.
- For slow growing oligopolistic markets characteristic very high barriers. As a rule, these are industries with complex technology, large equipment, the high size of minimally efficient production, significant costs for sales promotion. These industries are characterized by positive , due to which the minimum (min ATC) is achieved only with a very large output. In addition, entering a market dominated by well-known brands inevitably leads to high initial investment. Only large competitive firms with the necessary financial and organizational resources can afford to enter such markets.
- For young emerging oligopolistic markets it is possible for new firms to enter because demand expands quickly enough that an increase in supply does not have a downward effect on prices.
Loading...