An oligopoly is a market structure in which a small number of sellers dominate and the entry of new producers into the industry is limited by high barriers.
The first characteristic of an oligopoly is that there are few firms in the industry. This is evidenced by the etymology of the very concept of "oligopoly" (Greek "oligos" - several, "poleo" - I sell, trade). Usually their number does not exceed ten Fischer, S. Economics / S. Fischer, R. Dornbusch, R. Schmalenzi. M., 2010. P.213.
The second characteristic feature of an oligopoly is the high barriers to entry into the industry. They are connected, first of all, with economies of scale of production (scale effect), which acts as the most important reason for the widespread and long-term preservation of oligopolistic structures.
Economies of scale are an important but not the only reason, as the level of concentration in many industries exceeds the optimally efficient level. Oligopolistic concentration is also generated by some other barriers to entry into the industry.
The third characteristic feature of an oligopoly is universal interdependence. An oligopoly occurs when the number of firms in an industry is so small that each of them, when forming its own economic policy forced to take into account the reaction from competitors.
Oligopoly is one of the most common market structures in modern economy. In most countries, almost all branches of heavy industry (metallurgy, chemistry, automotive, electronics, ship and aircraft building, etc.) have just such a structure.
Figure 1 - Features of an oligopoly Microeconomics. Theory and Russian practice: textbook / col. Auth.; ed. A.G. Gryaznova, A.Yu. Yudanov. M., 2006. P.354
The most noticeable feature of an oligopoly is the small number of firms operating in the market. However, one should not think that companies can literally be counted on the fingers.
In an oligopolistic industry, as in monopolistic competition, there are often many small firms along with large ones. However, a few leading companies account for the majority of the industry's total turnover, and it is their activities that determine the course of events.
Formally, oligopolistic industries usually include those industries where several largest firms(in different countries from 3 to 8 firms are taken as a reference point) produce more than half of all output. If the concentration of production is lower, then the industry is considered operating in conditions of monopolistic competition.
In Russia, the raw material industries, ferrous and non-ferrous metallurgy are clearly oligopolistic; almost all sectors that managed to survive the current crisis and on which the domestic economy still relies.
The concentration of production in the hands of the 8 leading firms here ranges from 51 to 62%. Undoubtedly, the main sub-sectors of chemistry and engineering (production of fertilizers, automotive industry, aerospace industry and etc.).
In sharp contrast to them are the light and food industries. In these industries, the largest 8 firms account for no more than 10%. The state of the market in this area can be confidently characterized as monopolistic competition, especially since product differentiation in both industries is exceptionally large (for example, the variety of varieties of sweets that not even all of food industry, and only one of its sub-sectors is the confectionery industry) Economy of the industry: tutorial/ A.S. Pelikh et al. Rostov n/D, 2011. P.115.
Of course, the establishment of a quantitative boundary between oligopoly and monopolistic competition is largely arbitrary. After all, the two named types of market also have qualitative differences.
In monopolistic competition, the decisive reason imperfect market is product differentiation. In an oligopoly, this factor is also important. There are oligopolistic industries in which product differentiation is significant (for example, the automotive industry). But there are also industries where the product is standardized (cement, oil industry, and most sub-sectors of metallurgy).
The main reason for the formation of an oligopoly is economies of scale. An industry acquires an oligopolistic structure if the large size of the firm provides significant cost savings and, therefore, if large firms in it have significant advantages over small ones.
However, there can never be many large firms in an industry. Already the multibillion-dollar value of their plants serves as a reliable barrier to the emergence of new companies in the industry.
In the usual course of events, a firm becomes larger gradually, and by the time an oligopoly is formed in the industry, a narrow circle of largest firms has actually been determined. In order to invade it, the "stranger" must immediately lay out such an amount that the oligopolists have gradually invested in the business over decades. Therefore, history knows only a very small number of cases when a giant company was created “from scratch” through one-time huge investments (we will refer to AvtoVAZ in the USSR and Volkswagen in Germany; it is characteristic that in both cases the state acts as an investor, i.e. non-economic factors played an important role in the formation of these firms).
But even if funds were found for the construction of a large number of giants, they would not be able to work profitably in the future. After all, the market capacity is limited. Consumer demand is enough to absorb the products of thousands of small bakeries or auto repair shops. However, no one needs metal in quantities that could smelt thousands of giant domains.
Oligopoly and its main models.
1. The essence of the oligopoly and its character traits
2.Key indicators for measuring market concentration (IndexHerfindahl - Hirschman)
3. Cournot model (duopoly)
4. Oligopoly based on collusion
5. Oligopoly not based on collusion
6. Cost models
1) The essence of oligopoly and its characteristic features
Oligopoly- a type of market structure in which several firms and each of them is able to independently influence the price.
It includes:
Aluminum production;
Copper production;
Steel production;
Automotive industry;
Refrigerators, vacuum cleaners, etc.
Main features:
1) a small number of firms dominating the market
2) products can be homogeneous or differentiated
3) restrictions on access to the market for new firms (natural barriers include: economies of scale, which can make the coexistence of many firms in the market unprofitable, because this requires large financial resources. We are talking about a natural oligopoly. In addition, patenting and licensing firms may also take strategic actions that make it difficult for new firms to enter a given market)
4) each firm is able to influence market price, but it depends on the nature of the interaction between firms. Collusion has a significant impact on pricing
5) the general interdependence of firms (an oligopolist must anticipate the reaction of competitors to a change in their pricing strategy, given that competitors can predict the situation. All this is called oligopolistic relationship.
2) Key indicators for measuring market concentration (Index Herfindahl - Hirschman)
In practice, when studying this or that market structure, they use such a characteristic as its concentration. This is the degree of dominance in the market by one or more firms. There is an indicator that reflects this concentration. This is the concentration ratio - the percentage of all sales for a certain number of firms. The most common is the "four-firm share": their sales are divided by the sales of the entire industry. There may be a “share of six firms”, “a share of eight firms”, etc. But this indicator has a limitation: it does not take into account the difference between monopolies and oligopolies, because the coefficient will be the same where one firm dominates the market and where 4 firms share the market. The disadvantage is overcome with the help of the Herfindahl-Hirschman index. It is calculated by squaring the market share of each firm and summing the results.
H \u003d d 1 2 + d 2 2 + ... + d n 2, where
n is the number of competing firms;
d 1 , d 2 … dn - percentage of firms
With increasing concentration, the index increases. Its maximum value is inherent in a monopoly, where it is equal to 10,000. Let's consider what the choice of the optimal production volume and price is like under an oligopoly. So this is the choice that maximizes profit. Since the choice depends on the behavior of firms, there is no single model of firm behavior in an oligopoly. There are various models:
1) Cournot model
2) model based on conspiracy
3)model. not based on collusion (prisoner's dilemma)
4) tacit collusion (leadership in general)
3) Cournot model (duopoly)
The model was introduced in 1938 by the French economist Augustine Cournot.
Duopoly- a special case of oligopoly, when only two firms compete with each other in the market.
Firms produce homogeneous goods and the market demand curve is known.
The output of one firm a 1 changes depending on how, in the opinion of its management, a 2 will grow. As a result, each firm builds its own response curve. It tells how much the firm will produce at the expected output of its competitor. In equilibrium, each firm sets its output according to its response curve, so the output equilibrium is at the intersection of the two response curves. This equilibrium is the Cournot equilibrium. Here, each duopolist sets the output that maximizes his profit for a given competitor's output. This equilibrium is an example of what in game theory is called the Nash equilibrium, where each poker player does the best that can be done given the opponent's actions. As a result, no player has an incentive to change his behavior. This game theory was described by Neumann and Mongerstern in their work "Game Theory and Economic Behavior" (1944).
4) Oligopoly based on collusion.
Collusion- a de facto agreement between firms in an industry to fix prices and production volumes.
In many industries collusion is considered illegal. Conspiracy factors include:
a) the existence of a legal framework
b) high concentration of sellers
c) about the same average costs for firms in the industry
d) the inability of new firms to enter the market
It is assumed that in conspiracy, each firm will equalize its prices when prices go down and when prices go up. In this case, firms produce homogeneous products and have the same average cost. Then, when choosing the optimal volume of production that maximizes profit, the oligopolist behaves like a pure monopolist.
If two firms collude, they construct a contract curve that shows the various combinations of output of the two firms that maximize profits. Collusion is much more profitable for firms, in comparison with perfect equilibrium and in comparison with Cournot equilibrium, since they will produce less output while charging a better price.
(question 5) Oligopoly not based on collusion
If there is no collusion (inherent in the United States), then oligopolists, when setting prices, face prisoner's dilemma. This is a classic example of game theory in economics.
The two prisoners were charged with a joint crime. They sit in different cells and cannot communicate with each other. If both confess, then the prison term for each will be 5 years. If not, then the case is not completed and everyone will receive 2 years. If the first confesses and the other does not, then the first will receive 1 year in prison, and the second 10 years.
There is a matrix of possible outcomes:
Prisoners face a dilemma: to confess or not to commit a crime. If they could agree not to confess, they would receive 2 years in prison. But, if such an opportunity existed, they could not trust each other. If the first prisoner does not confess, then he runs the risk that another will be able to take advantage of this. Therefore, whatever the first does, it is more profitable for the second to confess. Then both are more likely to confess and go to prison for 5 years.
Oligopolists also often face a prisoner's dilemma. Let there be two firms. They are the only sellers on the market for this product. They are faced with a dilemma: set a high or low price?
1) If both firms set a high price, they will receive 20,000,000 rubles each.
2) If they set a relatively low price, they will receive 15,000,000 rubles each.
3) If the first firm raises the price, and the second lowers it, then the first will receive 10,000,000 rubles, and the second 30,000,000 rubles at the expense of the first.
Conclusion: it is obvious that it is beneficial for each firm to set a relatively low price, regardless of how the competitor does and get 15,000,000 rubles each. The Prisoner's Dilemma explains price rigidity under oligopoly.
(question 6) Cost models
A broken "demand curve" describes the behavior of a firm that does not collude with competitors. The model is based on the fact that there are possible options for the behavior of market participants. When one of the competitors changes the price, others will be able to choose one of the possible solutions:
1) Align prices and adjust to the new price
2) Do not respond to price changes by one of the competitors
3) Let one firm raise prices, then the rest will raise prices after this firm. The firms in the industry will lose some sales, so if one firm increases the price, the others do not respond.
4) Let one firm on the market lower prices, then if competitors do not lower prices, then the firm takes away some of the buyers from them. So if one firm cuts prices, other firms do the same.
Conclusion: to reduce prices following a competitor's price decrease and not respond to the latter's price increase is the essence of a broken "demand curve" in the oligopoly market.
There is a broken demand curve in an oligopoly market.
P-price of a unit of production;
Q-number of products;
D-demand;
P about- existing market price
If firm A raises the price above the existing base price (P o), then competitors most likely will not raise the price. As a result, the company will lose some of its customers. Demand for its products above point A is highly elastic. If firm D lowers its price, competitors will also lower their price. Therefore, at a price below Pо, demand is less elastic. Firm A's price cuts can also trigger a price war, where firms take turns cutting prices until some of them lose money and shut down production. Therefore, in a war, the strongest wins. But the policy is risky, so it is not known which of the firms is more “brisk”.
Cost + model The firm determines the level of costs per unit of output, and then adds to the costs the planned level of profit (approximately 10% -15%). The principle is used where products are differentiated (for example, in the automotive industry). The model shows that the firm does not adjust its costs to the market price. Such behavior of the company is possible in the absence of tangible pressure from competitors.
Oligopoly- a market in which there are several firms, each of which controls a significant share of the market (from the Greek "oligos" - few, few). This is the predominant form of the modern market structure.
Signs of an oligopoly:
1. The presence on the market of several large firms (from 3 to 15 - 20).
2. The products of these firms can be both homogeneous (the market for raw materials and semi-finished products) and differentiated (the market for consumer goods). Accordingly, pure and differentiated oligopolies are divided.
3. Carrying out an independent price policy, however, price control is limited by the mutual dependence of firms and is to some extent implemented through agreements between them.
4. Significant restrictions on entering the market associated with the need for significant capital investments to create an enterprise in connection with the large-scale production of oligopolistic firms. In addition, there are barriers that are characteristic of a monopoly - patents, licenses, etc.
An important feature of such a market is also that firms can take a number of actions (regarding sales volumes and prices of goods) aimed at preventing potential competitors from entering the market.
5. The inexpediency of price competition and the advantage of non-price competition, in which successful solutions can provide market advantages for some time.
6. The dependence of the strategic behavior of each firm (determining the price and output volumes, the beginning advertising campaign, investment in the expansion of production) from the reaction and behavior of competitors, which affects the market equilibrium.
In general, an oligopoly is intermediate between a monopoly and perfect competition (equilibrium price oligopoly market is lower than monopoly but higher than competitive).
There are many variants of oligopoly: there can be either 2-4 leading firms (hard oligopoly) or 10-20 (soft oligopoly) in the industry. The mechanisms of interaction between firms in these conditions will differ. General interdependence makes it difficult to predict the corresponding reaction of a competitor and makes it impossible to calculate demand and marginal income for an oligopolist.
Oligopolistic behavior implies incentives for concerted action in setting prices. The large size of firms does not contribute to their market mobility, so collusion between firms in order to maintain prices, limit output and jointly maximize profits comes from the greatest benefits.
Collusion is an explicit or implicit agreement between firms in an industry to fix prices and outputs or to limit competition between them. Collusion is most likely given its legitimacy and a small number of firms. Differences between firms in products, in costs, in demand, the ability to reduce prices in secret from others - make it difficult to collude.
If several firms in an oligopolistic market are approximately the same in size and level of average costs, then they will have the same price level and profit-maximizing output. Joint price policy actually turn oligopolistic market into a pure monopoly. All this pushes the oligopolists to the conclusion cartel agreements.
If the collusion is legal, manufacturers of the same product often enter into an agreement to share the market, and a group of such firms forms cartel. Such an agreement establishes for all its participants their shares in the volume of production and sales, prices for goods, terms of employment work force, patent exchange. Its goal is to increase prices above competitive levels, but not to limit the production and marketing activities of participants. From here the main problem of the cartel- this is the coordination of decisions of its participants regarding the establishment of a system of restrictions (quotas) for each firm.
Question 22. Determining the price and volume of production in an oligopoly. Pricing models in an oligopoly
There is no general theory of pricing in an oligopoly. There are a number of models that explain the market behavior of an oligopoly depending on what assumptions the firm has about the reaction of its competitors.
The specific market model for an oligopolist is shown in Fig. one.
Rice. 1. Broken line of demand
Broken Demand Curve Model(R. Hall, Hitch, P.-M. Sweezy, 1939) explains why an oligopolistic firm is reluctant to abandon its price-output decision, due to which prices in an oligopoly have a certain stability in short term with some change in the value of costs (which cannot be said about the market of perfect competition).
Suppose there are three firms x, y and z in the market. The market price was fixed at R o. Consider how firms y and z will react to a price change by firm x.
If firm x raises its price above P o, then firms y and z will most likely not follow and leave prices at P o. As a result, firm x will lose customers, and firms y and z will expand their market share. Thus, the price increase is not profitable for firm x; the demand for its products in section BA is quite elastic.
If firm x cuts its price to increase sales, competitors are likely to retaliate with a price cut to protect their market share. Therefore, firm x will not receive a significant increase in demand (demand in section AD is relatively inelastic).
As a result of different reactions of competitors to price changes, the demand curve will take the form of BAD. Both of the most likely options for the consequences of a price change do not bring a significant positive result to the company (price reduction - an insignificant increase in sales, price increase - a decrease in sales). Therefore, it can be assumed that prices in such a market will be stable (firms pursue a policy of “price rigidity”).
This assumption can be confirmed as follows. The bend in the demand curve at point A corresponds to a break in the MR line, which in Fig. 1 is represented by the broken line BCEF. If the MC curve intersects it on the CE segment (all points of which correspond to the Cournot point by definition), the firm has no reason to refuse the price P o (i.e., a change in MC, expressed in the intersection of several MC curves of the CE segment, will not cause a price change) . Some increase in costs does not lead to a change in price until the MC curve rises above point C.
If there is an increase in demand for this product, then the demand line BAD will shift to the right upwards, and along with it the line MR will shift to the right, including its vertical section. Given the intersection of the MC line with the MR line on its vertical section, the optimal price for the oligopolist will remain the same price, although the optimal output volume increases. Thus, even with a change in demand for products, the oligopolist is not inclined to change the price, but changes the volume of production.
As a result, according to this model, we can formulate Cournot equilibrium: no firm is interested in changing the price of its product until its competitor changes the price of its product. This is due to the fact that after the firm changes the original price, in an oligopoly, it will no longer be able to return to it. As a result, equilibrium in an oligopoly can be established at a price corresponding to the monopoly one. However, this outcome is less likely as the number of competitors in the industry increases: it increases the likelihood that someone can lower the price of their product, upsetting the market equilibrium.
The broken demand curve model has two disadvantages:
1) it is not explained why the current price was exactly P o; it is also impossible to explain how this price was established initially (i.e., the model does not explain the principles of oligopolistic pricing);
2) as economic practice shows, prices are not as inflexible as this demand curve implies: in an oligopoly, they have a clear upward trend.
All oligopoly models have common features, which can be viewed in duopoly models(Antoine Cournot, 1838). Duopoly- a special case of an oligopoly, where two producers of homogeneous products participate, each of which is able to satisfy the entire effective demand for this market. This structure is often found in regional markets and reflects all characteristics oligopoly. The essence of this model- each of the competitors determines the optimal supply volume for itself with a given supply volume of the other, and the combination of these volumes reveals the market price. Thus, this model describes the process of pricing in an oligopoly. Cournot's basic premise was an assumption about the response of each firm to the behavior of competitors. It's obvious that duopoly equilibrium is that each duopolist sets the output that maximizes his profit given his competitor's output, and so neither has an incentive to change that output. At prices above the point of intersection of the reaction lines, each firm has an incentive to reduce the price set by a competitor, at prices below the point of intersection - on the contrary.
Thus, under this assumption, there is only one price that the market can set. It can also be shown that the equilibrium price moves gradually from the monopoly price to the price equal to marginal cost. Consequently, Cournot equilibrium in an industry where there is only one firm, is achieved at a monopoly price; in an industry with a significant number of firms - at a competitive price; and in an oligopoly, it fluctuates within these limits.
The development of this model is leader pricing model, in which the leader sets not the volume of his production, but the price of his products.
In an oligopoly market, a monopoly price can be set without explicit agreement between competitors. But the more competitors, the more likely it is that one of them will reduce the price of their products for the sake of a temporary benefit. For example, the struggle of two oligopolists for a buyer by setting ever lower prices will eventually come down to an equilibrium between them in the form (i.e., the price will fall to the level of perfect competition).
R = MS = AC
This case, so-called price wars, described Bertrand model, according to which firms consistently reduce prices to the level of average costs, trying to force competitors out of the market.
Typically, oligopolistic firms set prices and divide markets in such a way as to avoid the prospect of price wars and their adverse effects on profits. Therefore, in modern conditions their price competition most often results in agreements.
Most the easy way implementing a constant price ratio strategy is cost-plus pricing. It is used because of the inherent uncertainty in the market about the demand for the product and the difficulty of determining marginal cost. The principle, "cost plus," is a pragmatic way of solving the problem of actually estimating marginal revenue and marginal cost, in which certain standard costs are taken to determine the price, to which economic profit is added in the form of a premium. This method does not require an in-depth study of demand curves, marginal revenue and cost curves, which vary by product. For a coordinated pricing policy, it is enough for firms to agree on the amount of this premium.
Pricing using such a markup on costs guarantees the firm sufficient revenue to cover variable costs, fixed costs and the opportunity cost of using factors of production.
In addition to all of the above, in the analysis of oligopolistic pricing, it is increasingly used game theory. It is often noted that oligopoly is a game of characters in which each player must anticipate the opponent's actions. After weighing the possible consequences of different decisions, each firm will realize that it is most rational to assume the worst.
Oligopoly (from the ancient Greek lYagpt - "small", and rshlEsh - "I sell, trade") - a type of market structure of imperfect competition, in which a limited number of large enterprises and entry into the industry is limited by high barriers. Oligopoly arises in industries that produce both standardized products (copper, aluminum, sugar) and differentiated goods (automobile, tobacco, alcoholic beverages, brewing, etc.).
Its first and main feature is the presence on the market of a limited number of manufacturers. Typically, these companies produce a similar but not the same product, have a large volume of production, and each of them controls a significant market share. Examples of an oligopoly are manufacturers of non-ferrous metals, automobiles, tobacco products, etc.
Another one salient feature oligopoly -- a high degree of interdependence and coordination of action, since the number of enterprises in the industry is so limited that each of them, when making decisions on prices and output, is forced to take into account the reaction of competitors. Firms that know that their actions will affect competitors in the industry make decisions only after they understand the nature of the reaction of rivals.
The dependence of the behavior of each firm on the reaction of competitors is called the oligopolistic relationship. But the oligopolistic relationship can lead not only to a fierce confrontation, but also to an agreement. The latter occurs when oligopolistic firms see opportunities to jointly increase their income by raising prices and concluding an agreement on the division of the market. If the agreement is open and formal and involves all or most of the producers in the market, it results in the formation of a cartel.
Oligopolistic firms mainly use methods of non-price competition. Oligopoly is one of the most common market structures in the modern economy. In most countries, almost all branches of heavy industry (metallurgy, chemistry, automotive, electronics, shipbuilding and aircraft building, etc.) have just such a structure.
Since there is no general oligopoly model, firms in the same industry can interact both as monopolists and as competitive firms. It all depends on the nature of the interaction between firms.
With the coordinated behavior of the firm, oligopolists take into account and coordinate the market strategy and tactics by simulating pricing and competition strategies with each other (cooperative strategy), price and supply will tend to be monopoly, and the extreme form of such a strategy will be a cartel.
Uncoordinated behavior of firms, i.e. when firms follow a non-cooperative strategy, pursue an independent strategy aimed at improving the position of the company, prices and strategy will approach competitive prices, can lead to an extreme form of this manifestation - "price wars".
However, not every company can afford such behavior. If the firm's share is one-third of the market, then the response of the other firms that coordinated their actions will lead to its displacement from the industry.
Therefore, such a strategy can only be implemented by a leading firm that controls more than half of the market. Relationship and coordination in an oligopoly are very closely related to pricing policy.
Thus, the characteristic features of an oligopoly are:
- 1) a limited number of firms;
- 2) high barriers to entry into the industry, limited access;
- 3) a significant concentration of production in individual firms;
- 4) strategic behavior of firms, their interdependence.
According to the concentration of sellers in the same market, oligopolies are divided into dense and discharged. Dense oligopolies conditionally include such sectoral structures that are represented on the market by 2-8 sellers. Market structures that include more than 8 business entities are referred to as sparse oligopolies. This kind of gradation makes it possible to evaluate the behavior of enterprises in a dense and sparse oligopoly in different ways.
In the first case, due to the very limited number of sellers, various kinds of collusion are possible in relation to their coordinated behavior in the market, while in the second case this is practically impossible.
Based on the nature of the products offered, oligopolies can be divided into ordinary and differentiated.
An ordinary oligopoly is associated with the production and supply of standard products. Many standard products are produced in an oligopoly - these are steel, non-ferrous metals, building materials.
Differentiated oligopolies are formed on the basis of the production of a diverse range of products. They are typical for those industries in which it is possible to diversify the production of goods and services offered.
It is customary to say that oligopolistic industries are dominated by the Big Two, Big Three, Big Four, and so on. More than half of sales come from 2 to 10 firms. For example, in the United States, four companies account for 92% of the production of all cars.
Oligopoly is also characteristic of many industries in Russia. So, cars produced by five enterprises (VAZ, AZLK, GAZ, UAZ, Izhmash). Dynamic steel is produced by three enterprises, 82% of tires for agricultural machines - by four, 92% of soda ash - by three, the entire production of magnetic tape is concentrated in two enterprises, motor graders - in three.
Light and food industries stand in sharp contrast to them. In these industries, the largest 8 firms account for no more than 10%. The state of the market in this area can be confidently characterized as monopolistic competition, especially since product differentiation in both industries is exceptionally large (for example, the variety of varieties of sweets that are produced not even by the entire food industry, but only by one of its sub-sectors - the confectionery industry).
But it is not always possible to judge the structure of the market on the basis of indicators relating to the entire national economy. So, often certain firms that own an insignificant share of the national market are oligopolists in the local market (for example, shops, restaurants).
If the consumer lives in big city, it is unlikely that he will go to the other end of the city to buy bread or milk. Two bakeries located in the area of his residence may be oligopolists.
Of course, the establishment of a quantitative boundary between oligopoly and monopolistic competition is largely arbitrary. After all, the two named types of market have other differences from each other. Products in an oligopolistic market can be either homogeneous, standardized (copper, zinc, steel) or differentiated (cars, household electrical appliances). The degree of differentiation affects the nature of competition.
For example, in Germany, car factories usually compete with each other in certain classes of cars (the number of competitors reaches nine). Russian car factories practically do not compete with each other, since most of them are narrowly specialized and turn into monopolists.
An important condition affecting the nature of individual markets is the height of the barriers that protect the industry (the amount of initial capital, the control of existing firms over new technology and latest products with the help of patents and technical secrets, etc.).
The fact is that there can never be many large firms in an industry. Already the multibillion-dollar value of their plants serves as a reliable barrier to the entry of new companies into the industry. In the usual course of events, the firm is gradually enlarged, and by the time an oligopoly is formed in the industry, a narrow circle of the largest firms has actually been determined. To break into it, you must immediately have the amount that the oligopolists have gradually invested in the business over decades. Therefore, history knows only a very small number of cases when a giant company was created “from scratch” through one-time huge investments (for example, Volkswagen in Germany, however, the state acted as an investor in this case, i.e. non-economic factors).
The level of density of the oligopolistic structure of the market is measured by the number of enterprises in a particular industry and their shares in the total sales of the industry within the national economy. Thus, by varying the number of enterprises, one can determine the degree of concentration of production, and, consequently, supply in the studied branch of social production.
At the same time, it should be emphasized that it would be imprudent to focus on the scale of only the national economy. Oligopolistic structures can be formed both at the regional and local levels of management. So, due to the specifics of the possibilities for consuming ready-made concrete, oligopolistic structures are also formed in local markets (a district, a small city), as well as at the regional level in the supply sector, for example, bricks.
However, we should not forget about two important points: intersectoral competition and product imports. The strength of the oligopoly is reduced by the supply of products by enterprises of other industries that have approximately the same consumer properties as the products of the oligopolists (for example, gas and electricity as a source of heat, copper and aluminum as a raw material for the manufacture of electrical wires). The weakening of the oligopoly is also facilitated by the import of similar goods or their substitutes. Both of these factors can contribute to the formation of more competitive structures compared to purely sectoral market structures.
oligopoly pricing model
Oligopoly (oligopoly) as a market model is a small number of jointly operating firms - manufacturers of a given product, which act together.
Oligopolistic type of market- a complex market situation when several companies sell a standardized or differentiated product, and the share of each participant in total sales is so large that a change in the quantity of products offered by one of the firms leads to a price change. Access to the oligopolistic market for other companies is difficult. Price control in such a market is limited by the interdependence of firms (except in the case of collusion). There is usually strong non-price competition in an oligopolistic market.
Why do oligopolies arise?
The answer is simple: where economies of scale are significant, sufficiently efficient production is possible only with a small number of producers. In other words, efficiency requires that the production capacity of each firm occupy a large share of the total market, and many small firms cannot survive.
The realization of economies of scale by some companies suggests that the number of competing manufacturers is simultaneously reduced due to bankruptcy or merger. For example, in the automotive industry during its formation there were more than 80 firms. Over the years, the development of mass production technologies, bankruptcies and mergers have weakened the struggle between manufacturers. Now in the US, the Big Three (General Motors, Ford and Chrysler) account for about 90% of sales of cars produced in the country.
The hallmarks of an oligopoly include:
o scarcity - dominance in the market of goods and services by a relatively small number of firms. Usually when we hear:
"big three", "big four" or "big six", it is obvious that the industry is oligopolistic;
- o standardized or differentiated products- many industrial products (steel, zinc, copper, aluminum, cement, industrial alcohol, etc.) are standardized in the physical sense and are produced in an oligopoly. Many industries producing consumer goods(cars, tires, detergents, postcards, breakfast cereals, cigarettes, many household electrical appliances, etc.) are differentiated oligopolies;
- o barriers to entry I am in an oligopolistic market - absolute cost advantage, economies of scale, the need for large start-up capital, product differentiation, patent protection of goods production;
- o fusion effect- the reason for the merger may be different reasons, the merger of two or more firms enables the new company to achieve greater economies of scale and lower production costs;
- o universal interdependence- no firm in an oligopolistic industry would dare to change its pricing policy without trying to calculate the most likely responses of its competitors.
Along with the oligopoly in the market, there are:
- o duopoly- the type of industry market in which there are only two independent sellers and many buyers;
- o oligopsony- a market in which there are several large buyers.
Determination of price and production volume
How are price and output determined in an oligopoly? Pure competition, monopolistic competition, and pure monopoly are fairly well-defined market classifications, while oligopoly is not. Exist like tough oligopoly, in which two or three firms dominate the entire market, and vague oligopoly, in which six or seven firms share, say, 70 or 80% of the market, while the competitive environment occupies the remainder.
Availability different types oligopoly prevents the development of a simple market model that will explain oligopolistic behavior. The overall interdependence complicates the situation, and the inability of the firm to predict the response of its competitors makes it virtually impossible to determine the demand and marginal revenue facing the oligopolist. Without such data, the company cannot even theoretically determine the price and volume of production that will maximize its profit.
Figure 12.1 presents the methods of oligopolistic price control.
Rice. 12.1.
1. Studying Oligopolistic Pricing it is expedient to begin with the analysis of a broken curve of demand (fig. 12.2). It occurs when an oligopolist cuts prices below those set in the market in order to force his competitors to do the same. The figure shows that the demand curve is a broken line (/) 2 £ |), and the marginal revenue curve has a vertical gap. Therefore, no change in price R, neither occurs in the quantity of the product offered, indicating the price inflexibility that characterizes oligopolistic markets.
Within certain limits, any increase in prices worsens the market situation. Thus, a price increase by one firm carries the risk of market capture by competitors who, by maintaining low prices, can lure away its former buyers. However, lowering prices in an oligopoly may not lead to the desired increase in sales, since competitors, having duplicated this maneuver, will retain their quotas in the market. As a result, the leading firm will not be able to increase the number of buyers at the expense of other companies. In addition, this step is fraught with a dumping price war. The proposed model well explains only the inflexibility of prices, but does not allow determining their initial level and growth mechanism. The latter is easier to explain through the method of conspiracy of oligopolists.
Rice. 12.2.
2. Collusion (clandestine collusion, collusion) occurs when firms reach a tacit (not formally contracted) agreement to fix prices, allocate markets, or limit competition among themselves. Collusive oligopolists tend to maximize total profits. However, differences in demand and costs, the presence of a large number of firms, fraud through price discounts, recessions and antitrust laws are an obstacle to this form of price control.
Figure 12.3 shows that profit maximization (shaded rectangle) is achievable only if every firm in the oligopoly sets a price R and produces a volume of output equal to Q.
The desire of oligopolists to conspire contributes to the formation of cartels - associations of firms that agree on their decisions about prices and volumes of products. This requires the development of a joint policy, the establishment of quotas for each participant and the creation of a mechanism for monitoring the implementation of decisions made. The establishment of uniform monopoly prices increases the revenue of all participants in the collusion, but the price increase is achieved through a mandatory reduction in sales. At present, explicit cartel-type agreements are rare. It is much more common to observe implicit (hidden) agreements.
3. Leadership in prices, or price leadership (price leadership) - is an informal price fixing method whereby one firm (the price leader) announces a price change and the others follow
Rice. 12.3.
companies following the leader soon record identical changes. Maintaining the price of certain level set by the leading firm is called the "price umbrella" (price umbrella). At the same time, the price leader actually performs a signal role, which eliminates the need for collusion. Essentially, it is the practice whereby the dominant firm, usually the largest or most efficient in the industry, changes its price, and all other firms automatically follow the change.
4. Pricing on the principle of "cost plus", or "cost plus" (traditional pricing, cost-plus pricing, markup pricing) - the traditional method of setting prices used by oligopolies. This is a pricing method in which the selling price is determined on the basis of the full cost of production by adding to it a "cape" in the amount of a certain percentage. This pricing method is not incompatible with collusion or price leadership. The well-known American company General Motors uses cost-plus pricing and is the price leader in the automotive industry.
Oligopoly Efficiency
Is an oligopoly an efficient market structure? There are two points of view on the economic consequences of an oligopoly.
According to the traditional view, an oligopoly operates similarly to a monopoly and can lead to the same results as a pure monopoly, although the oligopoly retains the external appearance of competition among several independent firms.
From the point of view of Schumpeter - Galbraith, the oligopoly contributes to the scientific and technical progress, and therefore, as a result, there are the best products, lower prices, and higher levels of output and employment than if the industry were organized differently.