Oligopoly

The Market of Few Sellers

Characteristics

  • The market has FEW sellers
  • Firms sell either IDENTICAL or SIMILAR products
  • MANY barriers to enter and exit the market

Collude

Unlike other markets, where sellers are price makers or price takers, oligopolistic businesses COLLUDE.

  • Collude= conspire to fix prices
  • If sellers collude, they can act as a CARTEL
  • Cartel= group with monopoly power
  • Cartels usually don't last long because there is too much incentive to cheat.

Examples

Cartels are illegal in the United States!

Smartphone Oligopoly

Android vs Apple vs Samsung

There are only a few producers of Smartphones- these 3 companies have the technology that other companies don't, so they can't compete.

Apple

Apple sells Smartphones. Their design of smartphone, the iPhone, is only slightly different than their competitors' smartphones. They still preform the basic functions of a smartphone. Because smartphone technology requires a lot of money to research, there is no such thing as 'little mom and pop store cellphones'.

There is a large demand for smartphones, but only a few firms able to supply it. So, they are able to collectively agree on the price. They are price makers.

Therefor, this is an oligopoly.

Pros and Cons

Pros:
  • Businesses have little competition- in fact, they work together with competitors- so more profit for them!
  • Prices in an oligopoly are usually lower than in a monopoly, but higher than it would be in a competitive market- so, fairly good for the customer
  • Prices tend to remain stable because if one company lowers the price too much, then the others will do the same. The result lowers the profit margin for all the companies, but is great for the consumer. For example, if Apple starts selling their products for $50 cheaper, all customers will flock to them. Samsung then, will have to drop their prices to keep up. This is good for the customer short term, but because the companies are no longer receiving a high profit, research for advances in technology will decrease.
Cons:
  • Major barriers keep companies from joining oligopolies. The major barriers are economies of scale, access to technology, patents, and actions of the businesses in the oligopoly. Barriers can also be imposed by the government, such as limiting the number of licenses that are issued.
  • Businesses can create a pseudo-cartel, raising the prices of products unnecessarily, and there's nothing customers can do about it
  • There is little fair wealth distribution as maximum profit is made by major players only, and small players are left with little profits.

Companies in oligopolies establish exclusive dealerships, have agreements to get lower prices from suppliers, and lower prices with the intention of keeping new companies out

The First Honest Cable Company

Firms are Interdependent

So the decision of one firm will affect all the other firms. They have to be aware how their competitors will respond. Often, they will want to all raise the price of their good- because there are no other sources of that good, the customer is forced to buy at that high price- this is ILLEGAL.

Poll

Why don't individual businesses lower their prices to beat their competitors?