Oligopolies are price setters rather than price takers. Additional sources of barriers to entry often result from government regulation favoring existing firms making it difficult for new firms to enter the market.
In this hypothetical case, the 3-firm concentration ratio is Further examples Banking The Herfindahl — Hirschman Index H-H Index This is an alternative method of measuring concentration and for tracking changes in the level of concentration following mergers.
If the index is belowthe market is not considered concentrated, while an index above indicates a highly concentrated market or industry — the higher the figure the greater the concentration. Key characteristics The main characteristics of firms operating in a market with few close rivals include: Interdependence Firms that are interdependent cannot act independently of each other.
A firm operating in a market with just a few competitors must take the potential reaction of its closest rivals into account when making its own decisions. For example, if a petrol retailer like Texaco wishes to increase its market share by reducing price, it must take into account the possibility that close rivals, such as Shell and BP, may reduce their price in retaliation.
Strategy Strategy is extremely important to firms that are interdependent. Because firms cannot act independently, they must anticipate the likely response of a rival to any given change in their price, or their non-price activity.
In other words, they need to plan, and work out a range of possible options based on how they think rivals might react. Oligopolists have to make critical strategic decisions, such as: Whether to compete with rivals, or collude with them. Whether to raise or lower price, or keep price constant.
Whether to be the first firm to implement a new strategy, or whether to wait and see what rivals do. Sometimes it pays to go first because a firm can generate head-start profits. Barriers to entry Oligopolies and monopolies frequently maintain their position of dominance in a market might because it is too costly or difficult for potential rivals to enter the market.
These hurdles are called barriers to entry and the incumbent can erect them deliberately, or they can exploit natural barriers that exist.
Natural entry barriers include: Economies of large scale production. If a market has significant economies of scale that have already been exploited by the incumbents, new entrants are deterred.
Ownership or control of a key scarce resource Owning scarce resources that other firms would like to use creates a considerable barrier to entry, such as an airline controlling access to an airport.
High set-up costs High set-up costs deter initial market entry, because they increase break-even output, and delay the possibility of making profits.
Many of these costs are sunk costswhich are costs that cannot be recovered when a firm leaves a market, and include marketing and advertising costs and other fixed costs. In order to compete, new entrants will have to match, or exceed, this level of spending in order to compete in the future.
Predatory pricing Predatory pricing occurs when a firm deliberately tries to push prices low enough to force rivals out of the market.Oligopoly & Game Theory Game Theory Game theory is mainly concerned with predicting the outcome of games of strategy in which the participants (for example two or more businesses competing in a market) have incomplete information about the others' intentions.
The Economist offers authoritative insight and opinion on international news, politics, business, finance, science, technology and the connections between them. Zero-sum game In game theory and economic theory, a zero–sum game is a mathematical representation of a situation in which a participant's gain (or loss) of utility is exactly balanced by the losses (or gains) of the utility of the other participant(s).
If the total gains of the participants are added up, and the total losses are subtracted. Microeconomics: Oligopoly Quiz. STUDY. PLAY.
The situation when a firm's long-run average costs fall as it increases the quantity of output it produces. Game theory is the study of how people make decisions in situations in which attaining their goals depends on their interactions with others; in economics, it is the study of the.
Econ Principles of Microeconomics Chapter 15 - Oligopoly Fall Herriges (ISU) Ch. 15 Oligopoly Fall 1 / 25 Outline 1 Understanding Oligopolies Herriges (ISU) Ch. 15 Oligopoly Fall 13 / 25 Game Theory The Prisoner’s Dilemma The Prisoner’s Dilemma Perhaps the most famous \game" is the so-calledPrison’s Dilemma.
However, most markets don’t fall into either category. For example, think of the market for soda - both Pepsi and Coke are major producers, and they dominate the market.
This type of market structure is known as an oligopoly, and it is the subject of this lecture.