home Magazine Main features of an oligopoly. Oligopoly and its characteristic features The main features of the oligopolistic market

Main features of an oligopoly. Oligopoly and its characteristic features The main features of the oligopolistic market

Oligopoly and its main models.

1. The essence of the oligopoly and its characteristic features

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 the market price, but this depends on the nature of the interaction of 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 given the 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 (from the ancient Greek lYagpt - “small”, and rshlEshch - “I sell, trade”) is a type of market structure of imperfect competition, in which a limited number of large enterprises operate in the industry, 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 characteristic feature of an oligopoly is a high degree of interdependence and coordination of actions, since the number of enterprises in the industry is so limited that each of them is forced to take into account the reaction of competitors when making decisions on prices and output. 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 strategies will approach competitive prices, this 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. Thus, passenger cars are 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).

If the consumer lives in a big city, he is unlikely to 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 the oligopolistic market can be either homogeneous, standardized (copper, zinc, steel) or differentiated (cars, household 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 the 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 consumption of ready-made concrete in local markets (district, small town), oligopolistic structures are also formed, 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 A market in which a relatively small number of sellers serve many buyers. Oligopoly refers to a type of imperfectly competitive market structure dominated by a very small number of firms.

Examples of oligopolies include manufacturers of passenger aircraft, such as Boeing or Airbus, car manufacturers, such as Mercedes, BMW.

Conditions for the emergence of an oligopoly

Oligopolies often arise naturally as companies grow and begin to capture more and more market share, gradually ousting or absorbing competitors. Over time, the number of companies offering certain products and services begins to dwindle to a few large corporations. Customers, in turn, tend to trust more eminent and reputable brands when choosing products.

In the formed oligopoly, the dominant companies feel quite free and can afford to completely control pricing. For example, many mobile phone companies significantly inflate the price of their products just because they are popular and can afford it.

The main features of an oligopoly

When there are a small number of firms in the market, they are called oligopolies. In some cases, the largest firms in an industry can be called oligopolies. The products that the oligopoly supplies to the market are identical to the products of competitors (for example, mobile communications), or have differentiation (for example, washing powders).

At the same time, price competition is very rare in oligopolistic markets. As a rule, it is very difficult for new firms to enter the oligopolistic market. Barriers are either legal restrictions or the need for large initial capital. Therefore, big business is an example of an oligopoly.

Thus, oligopolistic markets have the following characteristics:

a small number of firms and a large number of buyers. This means that the market supply is in the hands of a few large firms that sell the product to many small buyers;

differentiated or standardized products;

decisions of oligopolists regarding production volumes and prices are interdependent, i.e. oligopolies imitate each other in everything. So if one oligopolist lowers prices, then others will definitely follow his example. But if one oligopolist raises prices, others may not follow suit, as they risk losing their market share;

the presence of significant barriers to entry into the market, i.e. high barriers to market entry;

firms in the industry are aware of their interdependence, so price controls are limited.

Price policy

One of the main factors influencing the dominant companies on the market as a whole is the relationship with competitors in terms of pricing policy. The pricing policy of an oligopolistic company plays a huge role in her life.

As a rule, it is not profitable for a firm to increase the prices of its goods and services, since it is likely that other firms will not follow the first one, and consumers will "pass" to a rival company.

If the company lowers prices for its products, then in order not to lose customers, competitors usually follow the company that lowered prices, also reducing prices for the goods they offer: there is a “race for the leader”. That is, when a company cuts prices or introduces new services or products, competitors should follow suit. Otherwise, if they do not provide buyers with an alternative, they may lose those buyers altogether.

Thus, so-called price wars often occur between oligopolists, in which firms set a price for their products that is no higher than that of a leading competitor.

Types and structure of an oligopoly

Oligopolies can be classified as follows:

pure oligopoly is a situation in which firms produce homogeneous products (cement, steel, oil, gas.);

differentiated oligopoly is a situation where companies produce similar products (cars, planes, phones, computers, cigarettes, drinks, and so on);

A collective oligopoly is when firms cooperate with each other to determine the price or quantity of a product. Such a structure bears signs of collusion and monopolization of the market.

Oligopoly behavior strategies

The behavioral strategies of oligopolies are divided into two groups. The first group provides for the coordination of actions by firms with competitors (cooperative strategy), the second - the lack of coordination (non-cooperative strategy).

Oligopoly Models

In practice, the following models of oligopoly are distinguished:

price (volume) leadership model;

cartel model;

Bertrand model (price war model);

Cournot model.

Price (Volume) Leadership Model

As a rule, among the set of firms, one stands out, which becomes the leader in the market. This is due, for example, to the duration of existence (authority), the presence of more professional staff, the presence of scientific departments and the latest technologies, their higher market share. The leader is the first to make changes in price or output. At the same time, the rest of the firms repeat the actions of the leader. As a result, there is a coherence of common actions. The leader should be the most informed about the dynamics of demand for products in the industry, as well as about the capabilities of competitors.

cartel model

The best strategy for an oligopoly is to collude with competitors over production prices and output volumes. Collusion makes it possible to increase the power of each of the firms and use the opportunities for obtaining economic profits in the amount that would be received if the market were monopoly. Such collusion in economics is called a cartel.

Bertrand model (price war model)

It is assumed that each firm wants to become even larger and ideally capture the entire market. To force competitors to leave, one of the firms begins to reduce the price. Other firms, in order not to lose their shares, are forced to do the same. The price war continues until only one firm remains in the market. The rest are closed.

Cournot model

The behavior of firms is based on comparing independent forecasts of market changes. Each firm calculates the actions of competitors and chooses a volume of production and a price that stabilizes its position in the market. If the initial calculations are wrong, the firm corrects the selected parameters. After a certain period of time, the shares of each firm in the market stabilize and do not change in the future.

Pros and cons of an oligopoly

If we talk about the positive and negative aspects of the oligopoly as a structure, then it should be noted that there are both significant pluses and minuses.

The pluses include the fact that large companies compete quite strongly with each other, which stimulates the growth of product quality and scientific and technological progress in general.

However, such competition, combined with the huge opportunities of large firms, can significantly limit the emergence of new players in a particular product or service market.

Antitrust Law

Antitrust law is legislation against the accumulation of socially dangerous monopoly power by firms. The purpose of antitrust regulation is to force monopolists to charge a price for a product that provides them with only a normal profit, and not.

The measures of antimonopoly regulation are: regulation of prices of monopoly firms, reduction of the terms of validity of licenses of monopoly firms, splitting of monopoly firms, nationalization of monopolists.

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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, ship and aircraft building, etc.) have just such a structure.

An oligopoly is a market structure in which there are a small number of selling firms in the market for a product, each of which has a significant market share and considerable price control. 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 such a large part of the industry's total turnover that 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.

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.

It is customary to say that oligopolistic industries are dominated by the Big Two, Big Three, Big Four, etc. 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 characteristic of many industries in Russia. Thus, passenger cars are produced by five enterprises (VAZ, AZLK, GAZ, UAZ, Izhmash). Dynamic steel is produced by three enterprises, 82% of tires for agricultural machines - four, 92% of soda ash - three, all production of magnetic tape is concentrated at two enterprises, motor graders - at three Khoroshavina N. Side effect. Expert No. 38. 2003..

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 oligopolistic in the local market (for example, shops, restaurants, entertainment enterprises). If the consumer lives in a big city, he is unlikely to 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.

Products in the oligopolistic market can be either homogeneous, standardized (copper, zinc, steel) or differentiated (cars, household 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 specialized in a narrow field and turn into monopolists.

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, 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, one must immediately have 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 (Volkswagen in Germany can be considered an example, but in this case the state acted as an investor, i.e. non-economic factors).

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.

There are significant limitations in the availability of economic information in this market structure. Each market participant carefully guards trade secrets from its competitors.

A large share in output, in turn, provides oligopolistic firms with a significant degree of control over the market. Already each of the firms individually is large enough to influence the position in the industry. So, if the oligopolist decides to reduce output, this will lead to an increase in prices in the market. In the summer of 1998, AvtoVAZ took advantage of this circumstance: it switched to working in one shift, which led to the dispersal of unsold car stocks and allowed the plant to raise prices. And if several oligopolists begin to pursue a common policy, then their joint market power will come close to that possessed by a monopoly.

A characteristic feature of the oligopolistic structure is that firms, when forming their pricing policy, must take into account the reaction of competitors, that is, all producers operating in the oligopolistic market are interdependent. With a monopolistic structure, such a situation does not arise (there are no competitors), with perfect and monopolistic competition - also (on the contrary, there are too many competitors, and it is impossible to take into account their actions). Meanwhile, the reaction of competing firms can be different, and it is difficult to predict it. Let's say that a firm in the domestic refrigerator market decides to cut the price of its products by 15%. Competitors may react to this in different ways. First, they can cut prices by less than 15%. In this case, this company will increase the sales market. Secondly, competitors can also reduce prices by 15%. The volume of sales will increase for all firms, but due to lower prices, profits may decrease. Thirdly, a competitor may declare a "price war", that is, reduce prices even more. The question then becomes whether to accept his challenge. Usually, large companies do not enter into a “price war” between themselves, since its outcome is difficult to predict Khoroshavina N. Side effect. Expert No. 38. 2003..

Oligopolistic interdependence - the need to take into account the reaction of competing firms to the actions of a large firm in an oligopolistic market.

Any model of an oligopoly must proceed from taking into account the actions of competitors. This is an additional significant limitation, which must be taken into account when choosing a behavior pattern for an oligopolistic firm. Therefore, there is no standard model for determining the optimal volume of production and the price of products for an oligopoly. It can be said that determining the pricing policy of an oligopolist is not only a science, but also an art. Here, the subjective qualities of a manager play an important role, such as intuition, the ability to make non-standard decisions, take risks, courage, determination, etc.

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 for the production of goods;
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.

The presence of different types of oligopoly prevents the development of a simple market model that will provide an explanation for 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 at a certain level set by the leading firm is called a "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 a "markup" to it 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 Schumpeter-Galbraith point of view, oligopoly promotes STP and therefore results in better output, lower prices, and higher levels of output and employment than if the industry were organized differently.