Saturday, December 10, 2011

Oligopoly





An oligopoly is a market form in which a market or industry is dominated by a small number of sellers. Because there are few sellers, each oligopolist is likely to be aware of the actions of the others, and the action of these few sellers will make a big influence on the whole market. There are eight characters for a oligopolistic market. 

1) Profit maximisation conditions: An oligopoly maximises profits by producing where marginal revenue equals marginal costs.
2) Ability to set price: Oligopolies are price setters rather than price takers.
3) Entry and exit: Barriers to entry are high.
4 Number of firms: There are so few firms that the actions of one firm can influence the actions of the other firms.
5) Product differentiation: Product may be homogeneous (steel) or differentiated (automobiles).
6) Perfect knowledge: Oligopolies have perfect knowledge of their own cost and demand functions but their inter-firm information may be incomplete. Buyers have only imperfect knowledge as to price, cost and product quality.
7) Interdependence: Oligopolies are typically composed of a few large firms. Each firm is so large that its actions affect market conditions. Therefore the competing firms will be aware of a firm's market actions and will respond appropriately. This means that in contemplating a market action, a firm must take into consideration the possible reactions of all competing firms and the firm's countermoves.
A good example is the bank market. As the distribution of banks shows, the four big banks: JPMorgan, Bank of America, Citibank and Goldman Sachs dominate more than 90% bank market. 





Image source: http://nightlight.typepad.com/.a/6a00d8341c892053ef01347fec5334970c-pi
Wikipedia: http://en.wikipedia.org/wiki/Oligopoly

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