The phrase oligopoly is derived from the Greek language and means “few sellers”. Sloman & Sutcliffe (2001) defines an oligopoly as a type of imperfect market in which a ‘few firms between them share a large proportion of the industry.’ (p.236). Thus, industries like oligopolies are dominated by a small number of manufacturers that may produce either differentiated or nearly identical products. It is necessary to distinguish between two types of oligopoly structures. Therefore Harrison, Smith & Davies (1992) suggests the distinction between perfect oligopoly and imperfect oligopoly. Perfect oligopolies feature market players that produce nearly identical products such as sugar or CD’s whereas imperfect oligopolies distinguish themselves by differentiated products like cars or airplanes. [...]
Table of Contents
1. What is an oligopolistic market? How do the economic models of oligopolistic markets help our understanding of strategic interdependence?
2. Drawing on the article: “The ISC denies fee-fixing allegations”, explain the economic rationale for why independent schools would be willing collude, rather than compete?
Objectives and Topics
This paper examines the dynamics of oligopolistic market structures, focusing on how strategic interdependence between firms influences pricing behavior and market competition. It explores the economic rationale behind collusion versus competition, utilizing theoretical frameworks and a specific case study of British private schools to illustrate these concepts.
- Characteristics and entry barriers of oligopolistic markets
- Mechanisms of strategic interdependence and firm reaction
- Theoretical models including cartels and the kinked demand curve
- Application of game theory to explain cooperative behavior in markets
- Analysis of anti-competitive practices within the independent school sector
Excerpt from the Book
The interdependences of companies in oligopolies leave firms with two major strategic choices: collude or compete.
In the case of collusion, companies agree to avoid competition with one another. Collusion can either be formal or informal. A formal collusion agreement is referred to as a cartel. In a cartel, firms behave like a monopolist and maximise their profits. (e.g. OPEC cartel). Figure 1 illustrates how companies engaged in a cartel can achieve profit maximisation.
The marginal cost curve of the cartel (Industry MC) consists of all the individual marginal cost curves of its members. Profits are maximised in point a where Industry MC meets the industry marginal revenue curve MR. Therefore the cartel has to agree on price P1 and produce the quantity Q1 for maximising overall industry profits. Usually this entails a reduction of supply and increases prices. Thus, the big advantages of cartels compared to competition are increased profitability, maximised joint profits, lower industry costs and a reduced uncertainty faced by firms (Sloman & Sutcliffe, 2001).
Summary of Chapters
1. What is an oligopolistic market? How do the economic models of oligopolistic markets help our understanding of strategic interdependence?: This chapter defines the oligopoly market structure and discusses core features such as entry barriers, interdependence, and the use of the kinked demand curve model to explain price rigidity.
2. Drawing on the article: “The ISC denies fee-fixing allegations”, explain the economic rationale for why independent schools would be willing collude, rather than compete?: This section applies game theory, specifically the prisoners’ dilemma, to analyze why private schools engage in fee-fixing collusion to ensure stable profits rather than competing aggressively.
Keywords
Oligopoly, Strategic Interdependence, Collusion, Cartel, Game Theory, Prisoners’ Dilemma, Entry Barriers, Price Leadership, Market Power, Profit Maximisation, Kinked Demand Curve, Competition, Independent Schools, Fee-fixing, Tacit Collusion.
Frequently Asked Questions
What is the fundamental subject of this paper?
The paper examines the economic behavior of firms in oligopolistic markets, specifically focusing on how they handle strategic interdependence and the decision-making process between colluding or competing.
What are the primary thematic areas covered?
The text covers market structures, barriers to entry, collusion mechanisms, game theory models, and the real-world application of these economic principles to fee-setting in the British private school system.
What is the main research goal?
The goal is to explain the economic rationale behind why firms in oligopolies—specifically independent schools—choose to cooperate or collude rather than compete on price.
Which scientific methods are employed?
The paper utilizes microeconomic theory, including the analysis of demand curves and marginal costs, as well as game theory frameworks such as the prisoners’ dilemma to interpret firm strategy.
What is discussed in the main part of the text?
The main text details the mechanics of formal and informal collusion, the risks of cartel failure, the influence of price leaders, and the application of the kinked demand curve model.
Which keywords characterize this work?
Key terms include oligopoly, collusion, game theory, strategic interdependence, market power, and profit maximisation.
How does the kinked demand curve model explain price rigidity?
The model suggests that firms in an oligopoly face a demand curve that is sensitive to price increases (elastic) but inelastic regarding price decreases, creating an incentive to keep prices stable.
Why do private schools tend to collude according to the case study?
The paper suggests that collusion acts as a dominant strategy to avoid price wars, maintain stability, and maximize budgets, which are then reinvested into school facilities and education quality.
- Quote paper
- Andreas Wellmann (Author), 2004, Oligopolies. A Definition of Oligopolistic Markets, Munich, GRIN Verlag, https://www.grin.com/document/22180
