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- An oligopoly is where a few large firms have the majority of the market share.
- In an oligopoly without a collusion or cartel, factors of pricing should be the same as the factors of pricing for any other firm in a non-oligopolistic market. However, a market controlled by an oligopoly is more inelastic in terms of demand, and so they can afford to charge higher prices.
- It may seem to be common sense that a firm will lower its prices slightly in order to attract more consumers. However, this may initiate a price war with other firms, which causes the price of goods in the market to plummet.
- However, there are problems with this model. It makes no attempt to explain the original price and output – It explains stability but not price determination. On top of this, the model only takes price competition into account. In the context of this essay, this is useful, though economists must consider non-price competition, which is lost in the MC curve. This model also assumes rational behaviour by firms – It is known that price wars do happen, and one such example is where firms in Iceland were giving away free milk.
- In an oligopoly, market share is key. The closer a market approximates to monopoly, the greater the availability of supernormal profit. If a firm is to raise prices in an oligopoly, they will lose their market share and thus their supernormal profit. Consumers will move elsewhere, as competitors will hold their prices. This may not always be the case, as some customers will remain loyal to the brand. If an oligopolist cuts the price, other firms will cut theirs and there will be a price war, which reduces totally revenue, and is thus not beneficial to firms in the market. Due to these factors, prices are usually sticky in an oligopoly – Prices do not change much.
- However, in an oligopoly, there are occasional cartels and collusions. These are uncompetitive oligopolies, where firms try to fix prices amongst one another for their own benefit. This is usually illegal, though it is usually unstable – One firm may break ranks, and so there is no trust.
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