Download Oligopoly

Market power: definition and
measurement
Oligopoly
Price and mark up,
price stickiness.
Market power
• Definition: Degree of control over the price and
the quantity produced in a sector (by one or a
few firms)
• Measurement through an index of concentration
of production by larger companies (the first 4 or
8)
• The concentration is high in oligopolistic markets
• prices are sticky
The concentration ratio is a measure of the total output
produced in an industry by a given number of firms in the
industry. It measures the degree of control exercised by a
few firms in an industry
Concentration measured by the value of dispatch in
manifacturing industries, United States
4 major firms
subsequent 4 major firms
Tobacco
Household refrigerators
Bulbs
Vehicles
Greeting cards
Blast furnaces
Screws
Metal tools
Percentage of total dispatches
Oligopoly
• Market with few producers
• Awareness that the actions of each
participant (eg, choice of price,
advertising, changes in production quality
etc.) affect all the others.
• Direct comparison between companies
• An oligopoly can be characterized by
collusion or by a competition between
companies
Collusion and cartels
• COLLUSION
• -Implicit or explicit agreement between
firms to avoid or limit competition
• CARTEL
– Formal agreement between companies aimed
to prevent or restrict competition
• E.g.: OPEC
Collusion is prohibited (antitrust law),
however it is more difficult when:
• There are many companies in the sector
• The product is not homogeneous
• The demand and cost conditions change
rapidly
• There are not barriers to entry
• companies have excess of production
capacity
Management difficulties of a cartel:
the case of OPEC
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•
•
•
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Many producing countries
Agreements based on the quantity
Producers do not respect the quotas
Volatility of demand
Prices vary considerably and cause
disputes between producers
Non-collusive oligopoly
• For every action the single firm have to
anticipate the reaction of competitors
• Risk of a price war
• Great caution in changes
• Prices tend to be "sticky“
• Price are modified only in the face of major
and permanent changes in costs
Strategic barriers to entry
• Some barriers to entry are created by existing
firms strategically:
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–
–
–
Predatory pricing
Excess capacity
Advertising and R&D
Product proliferation
• Actions which oblige potential entrants to incur
in sunk costs
Comparison with perfect competition
• Perfect competition is the most favourable market for
consumers
• In oligopoly prices tend to be higher than the minimum
average total cost
• Should we take action to eliminate any oligopoly?
• It would not be technically possible and even
advantageous in a long term perspective
Is it desirable to eliminate market
imperfections and oligopoly?
•Large companies are those that invest more in
R & D (Schumpeter’s hypothesis: large firms have helped to
raise the standard of living rather than hold it down)
•The fragmentation of the industry slow down
technological progress
•Large firms are also a professional "school“,
they foster the formation of human capital,
necessary for development
•It should rather control the action of those who
operate in oligopolistic markets and prevent the
abuse of dominant position (antitrust law)
Role of small and medium-sized firms
• The lack of economies of scale is often
compensated by the higher flexibility
• Despite the lack of (or the low) investment in
R&D, several successful cases of innovation by
small firms
• CONCLUSION: To obtain innovation and
progress in the economic system there must be
a variety of situations and methods, combined
with the best guarantees for everyone to express
free initiatives