Oligopoly Markets

Oligopoly Markets

Initial Post

Are there unique features characteristic of oligopolistic firms? Oligopoly are firms that are dominated by few firms and thus they are characterized by certain features that are unique to them. These features include interdependence, advertising and group behavior. The firms in oligopoly are interdependent in making decisions. Thus any decision made by a single firm in the industry is faced by countermoves by other firms in the industry. For example, if one firm starts advertising its products to influence market in a bigger scale, other firms will launch advertising campaign to protect their markets (Mankiw, 2021). Also, if one firm changes their product design capturing market by storm, the other firms in the market are likely to follow suit. Further, firms in oligopoly market use advertising as a powerful tool in making policy changes in their operating environment. When one firm starts aggressive advertising campaign, other firms in the industry will put in place defensive advertising campaign to protect their market.

The oligopolistic market has elements of group behavior. This implies there can be two or more number of firms in the industry. However, a few number of firms makes it possible for each firm knows the effect of its actions on the group behavior. For instance, in the simulation results above when the firm produces 8 units the profits are higher since the total quantity is 24. When more quantity is offered by the firms, the profits dip as each firm increases the quantity reaching a total of 26 units. In oligopoly market, advertising is a matter of life and death unlike in monopoly market. This ensures oligopoly firm retain its market by being cognizant of the competitors advertising trends unlike in monopoly market where advertising becomes profitable only when the market has large number of consumers (Mankiw, 2021). Large number of consumers in monopoly may not have used the firm’s product or new product is being introduced. In monopoly market, there is only one firm maximizing profits but in oligopoly, each firm is working towards profit maximization. Firms in oligopoly set prices collectively after discussion or under the leadership of one dominant firm. Thus, the firms in the industry avoid being price takers or relying on market forces like in competitive markets. This makes the firms to enjoy higher profit margins than firms in competitive markets.

Peer Response

Hello Tracy Walker,

Tracy, it is true that oligopolies are few firms that are large enough to control market power. Moreover, it is true that they have identical products or similar just like you have pointed in airline industry. Further, the observation that the firms present challenges to market entry due to market power and are interdependent holds very well unlike monopolies that operate singly in a particular market. Tracy, I concur with you that oligopolies are not price takers unlike perfect competitive markets which have prices being equal to marginal cost (Hayes, 2021, July 24). Also, the oligopolies prices are higher than competitive market prices but less than in monopoly market. Tracy, its brilliant to argue that oligopoly produce large output than monopoly but usually less than that produced in perfect market where cartel influence decision on output and pricing.

Hello Candice Goodman,

Goodman, the observation you made that each firm in an oligopoly influences decision is perfectly correct. Thus, the firms reap greater benefits by working together resulting in greater profits. It is also prudent in your observation that the firms in oligopoly can set the level of output and prices to charge for their products offered in the market (Mankiw, 2021). Moreover, the firms portrays high level of mistrust that result in undercutting between them as one firm decides to operate against the agreed terms. The underlying difference between firms in oligopoly is the level of competition, the pricing strategies and the quantity supplied in the market unlike monopoly that set price, supply less output than market demand and faces no competition.

References

Hayes, A. (2021, July 24). What are current examples of oligopolies? Investopedia. https://www.investopedia.com/ask/answers/121514/what-are-some-current-examples-oligopolies.asp.

Mankiw, N. G. (2021). Principles of Economics (9th ed.). Cengage Learning, Inc