Business Economics - Oligopoly

What is Oligopoly?

• Dominated by a few large firms.
• Examples: global motor industry (Toyota, Volkswagen, GM, Renault-Nissan, Hyundai, Ford).
• Smaller firms survive by supplying market niches.

Features of Oligopoly

• Few Firms: Typically 3-6 firms.
• Large Firms Dominate: Control a large market share and influence prices.
• Different Products: Products are close substitutes with some differentiation (style, size, features).
• Barriers to Entry: High set-up costs and strong branding discourage new entrants.

Collusion

• Agreements to restrict competition (illegal in many countries).
• Forms of collusion:
  • Geographic market sharing.
  • Price fixing.
  • Output restriction.

Non-Price Competition

• Firms avoid price wars through advertising, promotions, branding, and product differentiation.

Price Competition

• Prices often remain stable due to fear of price wars.
• Interdependence: actions of one firm impact others.
• Price wars can occur but are usually short-lived.

Advantages of Oligopoly

• Choice: Introduction of new brands.
• Quality: Product differentiation can lead to superior quality.
• Economies of Scale: Cost savings passed to consumers as lower prices.
• Innovation: Resources for investment in R&D.

Disadvantages of Oligopoly

• Collusion: Higher prices and lack of choice for consumers.
• Cartels: Firms or countries agree on pricing or output (illegal in USA & EU). Example: OPEC.
• Price Wars: While beneficial in the short term, can eliminate firms and reduce competition long term.