Thus under oligopoly a firm not only considers the market demand for its product but also the reactions of other firms in the industry. This is achieved when the price of the product is greater than the average variable cost. This is therefore an important indicating factor that the market condition of chewing market satisfies the oligopoly market structure. Barriers to Entry of Firms: As there is keen competition in an oligopolistic industry, there are no barriers to entry into or exit from it. Homogeneous Product: Another important feature is Homogeneous products.
Apart from taking into account the demand for its products or cost of the products, oligopoly firms also consider the reactions of other rival firms to changes in their price and output policies. Raising price or lowering price could lead to a beneficial pay-off, but both strategies can lead to losses, which could be potentially disastrous. Individual oligarchs include RomanAbramovich, Alisher Usmanov, and the exiled Vladimir Gusinsky andBoris Berezovsky. In an oligopoly, firms operate under imperfect competition, the demand curve is kinked to reflect inelasticity below market price and elasticity above market price, the product or service firms offer are differentiated and barriers to entry are strong. At price P, and output Q, revenue will be maximised.
They have well-known brand names, state-of-the-art factories that provide for large volumes of production, and a few patents on how their shoes are made. A game theory approach to price stickiness Pricing strategies can also be looked at in terms of ; that is in terms of strategies and payoffs. The firms under oligopoly are interdependent as they are in a group. Under oligopoly, firms can develop similar kind of products or different products than its competitors Mazzeo 2002. However, there is a risk with such a rigid pricing strategy as rivals could adopt a more flexible discounting strategy to gain market share. This is because when the number of competitions is few, any change in price, direct effect on the fortune of the rivals, Who will them retaliate in changing their own prices. So, an oligopolist is neither a price-taker nor a price-maker.
Under the circumstances the demand for the product of the oligopolistic firm which makes the first move may decrease. Indeterminateness of Demand Curve: In market structures other than oligopolistic, demand curve faced by a firm is determinate. However, these profits cannot exceed beyond a certain level as new competitors will enter the market eventually, and undercut the firms' prices and decrease the overall profits of the industry. It has been analysed that the market structure is Oligopoly market structure whereby the majority of the market share has been occupied by the two major players including Cadbury Schweppes and Wrigley. Each firm sells a significant portion of the total output.
Cartel: A cartel is when a group of firms decide to agree on leveling out the output. The dominance of one firm in the oligopolistic market results in price leadership. An oligopoly is much like a monopoly, in which only one company exerts control over most of a market. Most oligopolistic industries are characterised by a feature: Price cuts are matched by price cuts but price increases are not. So each seller is always on the alert and keeps a close watch over the moves of its rivals in order to have a counter-move.
As for instance, the important feature of oligopoly as noted above signifies that in oligopoly market, there are few firms occupying majority of the market share. A promotional campaign is profitable if the marginal revenue from any extra sales exceeds the cost of the advertising campaign and marginal costs of producing an increase in output. We end up with two demand curves, depending on whether firm X lowers or raises its price. On the other hand, a monopolist produces a product which has only remote substitutes. Such prices are not market prices and thus not determined by demand and supply but are administered or managed by the firms themselves either through leader-follow relationship or some sort of collusion overt or covert.
There are a large number of reasons behind it. This includes measuring the market share in percentage for the top four largest firms in a particular industry. If persuasive advertising leads to an outward shift in demand, consumers are willing to pay more for each unit consumed. In an oligopoly, there are at least two firms controlling the market. Sweezy argued that the large oligopolistic firm is likely to anticipate the following competitive reaction pattern to a price change: 1. Usually oligopoly is understood to prevail when the numbers of sellers of a product are two to ten.
Where there is a formal agreement for such collusion, this is known as a cartel. For instance, if Pepsi lowers its price to 80 cents per can, Coke will be affected. Homogeneous or differentiated products 3. If Coke does not respond, it will lose significant market share. Oligopoly firms are large and benefit from economies of scale. In case of perfect competition, monopoly and monopolistic competition, the business firms are assumed to behave in such a way as to maximize their profits. So its characteristic of oligopoly mutual interdependence.
In other words, the model fails to explain how the price at which the demand curve is kinked is set in the first instance. A firm under oligopoly can start an aggressive advertising campaign with the intention of capturing a large part of the market. However, oligopoly companies consider group discussion, instead of developing pricing strategy on their own. Under perfect competition and monopoly expenditure on advertisement and other measures is unnecessary. Under monopolistic competition advertising plays an important role because of the product differentiation that exists under it, but not as much important as under oligopoly.
It is not a small enough part of the market like a competitive seller to be able to act as a price-taker. Assumption of profit maximisation gives overall good results in these situations where mass of people are involved and there is no interdependence of firms. These hurdles are called barriers to entry and the incumbent can erect them deliberately, or they can exploit natural barriers that exist. Since a perfectly competitive firm is one among a large number of firms producing an identical product, it is incapable of influencing the price of its product by its own individual action. In a monopolistic setup or a pure competition scenario, such a large sales promotional expenditure may not be required.