Oligopoly

The domination of a market by a small consortium of companies, who can run up costs and work in tandem to assert their control. Examples include major airlines, automobile manufacturers, and telephone companies. While it is theoretically feasible to start a company to compete against an oligopoly, the costs often run significantly higher than the estimated return on investment. As a result, the FTC closely monitors oligopolies in the United States of America, and many other countries have similar measures in place.

Economic model for any market dominated by a small number of firms. Generally, most markets tend towards an oligopoly so it is considered one of the most important. The main assumptions for an oligopoly are:-

• supply concentrated in the hands of a few firms, although there can be any number of firms in the industry.
• Firms are independent
• there are barriers to entry into the market (neo-classical model)

The features of the market are:-

Non-price competition - As the product in the market are not homogeneous, there is some brand loyalty. Therefore promotion of brands through advertising is essential for the major firms. For instance, Mars has to spend much on marketing to try and differentiate it's chocolate products from those of Cadbury. This will often mean a higher priced branded goods sell better than cheaper substitutes.

Price rigidity - self explanitary, really.

L-shaped cost curves - The variable costs over a large range of output have been observed to be constant, meaning cost curves deviate from their usual U-shapes.

Collusion - If oligopolistic firms collude, they can act like a monopoly, thus increasing abnormal profits. Although this is illegal in most cases it is still common.

The neo-classical model has a kinked demand curve. This is because the model has pessimistic assumptions - if one firm raises prices, others keep theirs constant while if they drop them so does the rest. Therefore the marginal revenue curve is...

£+
 +\
 +  \
 +    \
 +      \
 +      |
 +      |
 +      |
 +       \
 +        \
 ++++++++++++
0            qty

Price is then read off the average cost curve where it is directly above the point of intersection between the marginal revenue and marginal cost curves.