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An oligopoly (from
Greek#REDIRECT Greek Greek may refer to: Greece Anything of, from, or related to Greece Greece ( el, Ελλάδα, , ), officially the Hellenic Republic, is a country located in Southeast Europe. Its population is approximately 10.7 million as of ...
ὀλίγος, ''oligos'' "few" and πωλεῖν, ''polein'' "to sell") is a
market structure Market structure, in economics, depicts how firms are differentiated and categorised based on the types of goods they sell (homogeneous/heterogeneous) and how their operations are affected by external factors and elements. Market structure makes it ...
in which a
market Market may refer to: *Market (economics) *Market economy *Marketplace, a physical marketplace or public market Geography *Märket, an island shared by Finland and Sweden Art, entertainment, and media Films *Market (1965 film), ''Market'' (1965 ...
or
industry Industry may refer to: Economics * Industry (economics) In macroeconomics, an industry is a branch of an economy that produces a closely related set of raw materials, goods, or services. For example, one might refer to the wood industry ...
is dominated by a small number of large sellers or producers.


Description

Oligopolies can result from various forms of
collusion Collusion is a deceitful agreement or secret cooperation between two or more parties to limit open competition Competition is a rivalry A rivalry is the state of two people or groups engaging in a lasting competitive relationship. Riva ...
that reduce market competition. Such collusions can lead to higher prices for consumers and lower wages for the employees of oligopolies. In the absence of collusion among market participants, an oligopoly will develop into a situation similar to
perfect competition In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
. Oligopolists have their own
market structure Market structure, in economics, depicts how firms are differentiated and categorised based on the types of goods they sell (homogeneous/heterogeneous) and how their operations are affected by external factors and elements. Market structure makes it ...
. With few sellers, each oligopolist is likely to be aware of the actions of the others. According to
game theory Game theory is the study of mathematical model A mathematical model is a description of a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. ...
, the decisions of one firm therefore influence and are influenced by the decisions of other firms.
Strategic planning Strategic planning is an organization An organization, or organisation (Commonwealth English The use of the English language English is a of the , originally spoken by the inhabitants of . It is named after the , one of th ...

Strategic planning
by oligopolists needs to take into account the likely responses of the other market participants. Entry barriers include high
investment Investment is the dedication of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance Finance is the study of financial institution ...
requirements, strong consumer loyalty for existing brands, and
economies of scale In microeconomics Microeconomics is a branch of mainstream economics Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted by economists as a basis ...

economies of scale
, and these barriers effectively facilitate the formation and sustainability of collusion. The fundamental reason for the formation of oligopolies is related to future retaliation (deviation). In other words, firms will lose less for deviation and thus have more incentive to undercut collusion price (obtain short-term deviated profit) when future entry continues.Ivaldi, M., Jullien, B., Rey, P., Seabright, P., & Tirole, J. (2003). The economics of tacit collusion. There are other factors that could also facilitate collusion such as
market transparency In economics, a market is transparent if much is known by many about: What products and services or capital assets are supply (economics), available, market depth (quantity available), what price, and where. Transparency is important since it is on ...
and frequent interaction. In developed economies oligopolies dominate the economy as the perfectly competitive model is of negligible importance for consumers. Specifically, oligopolists will implement a practice called
price fixing #REDIRECT Price fixing#REDIRECT Price fixing Price fixing is an agreement between participants on the same side in a market to buy or sell a product, service, or commodity only at a fixed price, or maintain the market conditions such that the pr ...
to dominate the economy. Taking an example from the US in 2013 that most new prosecuted oligopolist cases were based on price-fixing. However, this will bring negative impacts since it ends up with less choices and high prices for customers. As a quantitative description of oligopoly, the four-firm
concentration ratio In an economic context, concentration ratios are used to quantify market concentration and are based on companies' market shares in a given industry. Market share can be defined as a firm's proportion of total sales in an industry, a firm's market ...
is often utilized and is the most preferable ratio for analyzing
market concentration Market is a term used to describe concepts such as: *Market (economics) A market is a composition of systems, institutions, procedures, social relations or infrastructures whereby parties engage in Exchange (economics), exchange. While parties m ...
. This measure expresses, as a percentage, the market share of the four largest firms in any particular industry. For example, as of fourth quarter 2008, if we combine the total market share of Verizon Wireless, AT&T, Sprint, and T-Mobile, we see that these firms, together, control 97% of the U.S. cellular telephone market. These four cellular telephone firms have become the top-tier in US carriers and were protected by the US government that acted as an intervention for other firms entering the market. Oligopolistic
competition Competition is a rivalry A rivalry is the state of two people or groups engaging in a lasting competitive relationship. Rivalry is the "against each other" spirit between two competing sides. The relationship itself may also be called "a ri ...
can give rise to a wide range of outcomes. In some situations, particular companies may employ restrictive trade practices (
collusion Collusion is a deceitful agreement or secret cooperation between two or more parties to limit open competition Competition is a rivalry A rivalry is the state of two people or groups engaging in a lasting competitive relationship. Riva ...
, market sharing etc.) in order to inflate prices and restrict production in much the same way that a
monopoly A monopoly (from Greek#REDIRECT Greek Greek may refer to: Greece Anything of, from, or related to Greece Greece ( el, Ελλάδα, , ), officially the Hellenic Republic, is a country located in Southeast Europe. Its population is approxi ...

monopoly
does. Whenever there is a formal agreement for such collusion between companies that usually compete with one another, this practice is known as a
cartel A cartel is a group of independent market participants who Collusion, collude with each other in order to improve their profits and dominate the market. Cartels are usually associations in the same sphere of business, and thus an alliance of r ...

cartel
. A prime example of such a cartel is
OPEC The Organization of the Petroleum Exporting Countries (OPEC, ) is an intergovernmental organization An intergovernmental organization (IGO) is an organization composed primarily of sovereign states (referred to as ''member states''), or o ...

OPEC
, where oligopolistic countries manipulate the worldwide oil supply and ultimately leaves a profound influence on the international price of oil. There are legal restrictions on such collusion in most countries and relevant regulations or enforcements against cartels (anti-competitive behaviours) enacted since the late of 1990s. For example,
EU competition law European competition law is the competition law Competition law is a law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. Competition law is implemented through public and private enforcem ...
has prohibited some unreasonable anti-competitive practises such as directly or indirectly fix selling prices, manipulate market supply or control trade among competitors etc., either by means of formal contracts or oral agreements. In the US, the ''Antitrust Division of the Justice Department and Federal Trade Commission'' was created to fight collusion among cartels''.'' However, a formal agreement is not a requirement for collusion to take place, as
tacit collusion Tacit collusion is a collusion Collusion is a deceitful agreement or secret cooperation between two or more parties to limit open competition by deceiving, misleading or defrauding others of their legal right. Collusion is not always conside ...
can be achieved through mutual understanding among firms. For the collusion to be prosecuted as a crime there must be actual and direct communication between companies. For example, in some industries there may be an acknowledged market leader that informally sets prices to which other producers respond, (known as
price leadership Tacit collusion is a collusion between competitors, which do not explicitly exchange information and achieving an agreement about coordination of conduct. There are two types of tacit collusion - concerted action and conscious parallelism. In a con ...
).
Tacit collusion Tacit collusion is a collusion Collusion is a deceitful agreement or secret cooperation between two or more parties to limit open competition by deceiving, misleading or defrauding others of their legal right. Collusion is not always conside ...
is becoming a more popular topic in the development of anti-trust law in most countries. In other situations, competition between sellers in an oligopoly can be fierce, with relatively low prices and high production. Hypothetically, this could lead to an efficient outcome approaching
perfect competition In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods ...
. The competition in an oligopoly can be greater when there are more competitors in an industry. Theoretically, it is harder to sustain cartels (anti-competitive behaviors) in an industry with a larger number of firms in that it will yield less collusive profit for each firm.Choi, J. P., & Gerlach, H. Forthcoming. Cartels and Collusion: Economic Theory and Experimental Economics. ''Oxford Handbook on International Antitrust Economics (Oxford University Press, Oxford, England)''. Consequently, existing firms may have more incentive to deviate. However, this conclusion is a bit more intuitive and empirical evidence has shown this conclusion or relationship is a bit more ambiguous and mixed. Thus the
welfare Welfare (or commonly, social welfare) is a type of government support intended to ensure that members of a society can meet basic human needs Maslow's hierarchy of needs is an idea in psychology Psychology is the science of mind and ...
analysis of oligopolies is sensitive to the parameter values used to define the market's structure. In particular, the level of dead weight loss is hard to measure. The study of
product differentiation In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods a ...
indicates that oligopolies might also create excessive levels of differentiation in order to stifle competition, as they could gain certain marker power by offering somewhat differentiated products. Oligopoly theory makes heavy use of
game theory Game theory is the study of mathematical model A mathematical model is a description of a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. ...
to model the behavior of oligopolies: * Stackelberg's
duopoly A duopoly (from Greek Greek may refer to: Greece Anything of, from, or related to Greece Greece ( el, Ελλάδα, , ), officially the Hellenic Republic, is a country located in Southeast Europe. Its population is approximately 10.7 mill ...
. In this model, the firms move sequentially (see
Stackelberg competition The Stackelberg leadership model is a strategic game in economics in which the leader firm moves first and then the follower firms move sequentially. It is named after the German economist Heinrich Freiherr von Stackelberg who published ''Market Str ...
). * 's duopoly. In this model, the firms simultaneously choose quantities (see
Cournot competition Cournot competition is an economic An economy (from Greek language, Greek οίκος – "household" and νέμoμαι – "manage") is an area of the Production (economics), production, Distribution (economics), distribution and trade, as well ...

Cournot competition
). *
Bertrand Bertrand may refer to: Places * Bertrand, Missouri, US * Bertrand, Nebraska, US * Bertrand, New Brunswick, Canada * Bertrand Township, Michigan, US * Bertrand, Michigan * Bertrand, Virginia, US * Bertrand Creek, state of Washington * Saint-Bertr ...
's oligopoly. In this model, the firms simultaneously choose prices (see
Bertrand competitionBertrand competition is a model of competition used in economics, named after Joseph Louis François Bertrand (1822–1900). It describes interactions among firms (sellers) that set prices and their customers (buyers) that choose quantities at the p ...
). When compared with Cournot and Bertrand's model, it can be seen that price competition is more aggressive and competitive, and also it is easier to sustain collusion under price competition.


Characteristics

Characteristics of oligopolies include: * Profit maximization: an oligopoly will
maximize In mathematical analysis, the maxima and minima (the respective plurals of maximum and minimum) of a function (mathematics), function, known collectively as extrema (the plural of extremum), are the largest and smallest value of the function, ei ...
its profits. * Price setting: oligopolies set rather than take prices.Perloff, J. ''Microeconomics Theory & Applications with Calculus''. page 445. Pearson 2008. * High barriers to entry and exit:Hirschey, M. ''Managerial Economics''. Rev. Ed, page 451. Dryden 2000. the most important barriers are government licenses,
economies of scale In microeconomics Microeconomics is a branch of mainstream economics Mainstream economics is the body of knowledge, theories, and models of economics, as taught by universities worldwide, that are generally accepted by economists as a basis ...

economies of scale
, patents, access to expensive and complex technology, and strategic actions by incumbent firms designed to discourage or destroy nascent firms. Additional sources of barriers to entry often result from government regulation favoring existing firms making it difficult for new firms to enter the market.Negbennebor, A: Microeconomics, The Freedom to Choose CAT 2001 * Few firms: there are so few firms that the actions of one firm can influence the actions of the other firms. * Abnormal long run profits: oligopolies retain abnormal long run profits. High barriers of entry prevent sideline firms from entering the market to capture excess profits. * Product differentiation: it can be homogeneous (steel) or differentiated (automobiles). * Perfect knowledge: assumptions about
perfect knowledge Certainty (also known as epistemic certainty or objective certainty) is the epistemic property that a person has no rational grounds for doubting a particular belief or set of beliefs. One standard way of defining epistemic certainty is that a ...
vary, but the knowledge of various economic factors can be generally described as selective. Oligopolies have perfect knowledge of their own cost and demand functions, but their inter-firm information may be incomplete. Buyers have only imperfect knowledge as to price, cost, and product quality.


Interdependence

: The distinctive feature of an oligopoly is
interdependence Systems theory is the interdisciplinary study of systems, i.e. cohesive groups of interrelated, interdependent parts that can be natural or man-made, human-made. Every system is bounded by space and time, influenced by its environment, defined by i ...
. Oligopolies are typically composed of a few large firms. Each firm is so large that its actions affect market conditions. Therefore, the competing firms will be aware of a firm's market actions and will respond appropriately. This means that in contemplating a market action, a firm must take into consideration the possible reactions of all competing firms and the firms' countermoves.Colander, David C. Microeconomics 7th ed. Page 288 McGraw-Hill 2008. It is very much like a game of
chess Chess is a board game Board games are tabletop game Tabletop games are game with separate sliding drawer, from 1390–1353 BC, made of glazed faience, dimensions: 5.5 × 7.7 × 21 cm, in the Brooklyn Museum (New Yor ...

chess
, in which a player must anticipate a whole sequence of moves and countermoves in order to determine how to achieve his or her objectives; this is known as
game theory Game theory is the study of mathematical model A mathematical model is a description of a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. ...
. For example, an oligopoly considering a price reduction may wish to estimate the likelihood that competing firms would also lower their prices for retaliation and possibly trigger a ruinous
price war Price war is "commercial competition characterized by the repeated cutting of prices below those of competitors". One competitor Competition arises whenever two or more parties strive for a common goal A goal is an idea of the future or ...
. Or if the firm is considering a price increase, it may want to know whether other firms will also increase prices or hold existing prices constant. This anticipation leads to price rigidity, as firms will only be willing to adjust their prices and quantity of output in accordance with a "price leader" in the market. An example for this interdependence among oligopolists such that
Texaco#REDIRECT Texaco Texaco, Inc. ("The Texas Company") is an American oil subsidiary of Chevron Corporation. Its flagship product is its fuel "Texaco with Techron". It also owns the Havoline motor oil brand. Texaco was an independent company until ...

Texaco
needs to take into consideration whether its own price cut will trigger Shell's incentive to match, and so that the benefit or privilege gained by low price would be eliminated. This high degree of interdependence and need to be aware of what other firms are doing or might do stands in contrast with the lack of interdependence in other market structures. In a perfectly competitive (PC) market there is zero interdependence because no firm is large enough to affect market price. All firms in a ''PC'' market are price takers, as the current market selling price can be followed predictably to maximize short-term profits. In a
monopoly A monopoly (from Greek#REDIRECT Greek Greek may refer to: Greece Anything of, from, or related to Greece Greece ( el, Ελλάδα, , ), officially the Hellenic Republic, is a country located in Southeast Europe. Its population is approxi ...

monopoly
, there are no competitors to be concerned about. In a monopolistically-competitive market, each firm's effects on market conditions are so negligible as to be safely ignored by competitors.


Non-price competition

: Oligopolies tend to compete on terms other than price. Loyalty schemes, advertisement, and product differentiation are all examples of non-price competition, which is perceived less risky and brings less disastrous impacts to business. In other words, oligopolists are able to extract more rents (charge prices above normal competition level without losing large consumers) by offering differentiated products or initiating promotion efforts. However, collusion among oligopolists is harder or more difficult to sustain along such non-price dimensions such as differentiation, marketing, product design. For fighting collusion and cartels in an oligopoly market, competition authorities have taken measures or practices to effectively discover, prosecute and penalize them
Leniency program
and economic analysis (screening) are currently two popular mechanisms.


Leniency program

Competition authorities prominently have roles and responsibilities on prosecuting and penalizing existing cartels and desisting new ones. Thus, authorities have created an effective tool called the leniency program, which makes antitrust firms to be more proactive participants in confessing their collusion behaviors in that they will be granted immunity from fines and still have a right to plea bargaining if not receive a full reduction. Nowadays, leniency program has been implemented by several countries like US, Japan and Canada. However, it causes negative impacts to competition authorities themselves in the wake of abusing of leniency program that there are still many cartels in society and the expected sanctions for colluded firms will experience a sharp drop. As a result, the total effect of the leniency program is ambiguous and an optimal leniency program is required.


Economic analysis

There are two screening methods that are currently available for competition authorities: structural and behavioral. In terms of structural screening, it refers to identify industry traits or characteristics, such as homogenous goods, stable demand, less existing participants, which are prone to cartel formation. While regarding behavioral one, is mainly implemented when a cartel formation or agreement has reached and subsequently authorities start to look into firms' data and figure out whether their price variance is low or has a significant price increase or decrease.


Oligopolies in countries with competition laws

Oligopolies become "mature" when competing entities realize they can maximize profits through joint efforts designed to maximize price control by minimizing the influence of competition. As a result of operating in countries with enforced
antitrust laws Competition law is a law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. Competition law is implemented through public and private enforcement. It is also known as ''anti-monopoly A ...
, oligopolists will operate under
tacit collusion Tacit collusion is a collusion Collusion is a deceitful agreement or secret cooperation between two or more parties to limit open competition by deceiving, misleading or defrauding others of their legal right. Collusion is not always conside ...
, which is collusion through a mutual understanding among the competitors of a market without any direct communication or contact that by collectively raising prices, each participating competitor can achieve economic profits comparable to those achieved by a monopolist while avoiding the explicit breach of market regulations. Hence, the kinked demand curve for a joint profit-maximizing oligopoly industry can model the behaviors of oligopolists' pricing decisions other than that of the price leader (the price leader being the entity that all other entities follow in terms of pricing decisions). This is because if an entity unilaterally raises the prices of their good/service and competing entities do not follow, the entity that raised their price will lose a significant market as they face the elastic upper segment of the demand curve. As the joint profit-maximizing efforts achieve greater economic profits for all participating entities, there is an incentive for an individual entity to "cheat" by expanding output to gain greater market share and profit. In the case of oligopolist cheating, when the incumbent entity discovers this breach in collusion, competitors in the market will retaliate by matching or dropping prices lower than the original drop. Hence, the market share originally gained by having dropped the price will be minimized or eliminated. This is why on the kinked demand curve model the lower segment of the demand curve is inelastic. As a result, in such markets price rigidity prevails.


Modeling

There is no single model describing the operation of an oligopolistic market. The variety and complexity of the models exist because two to 10 firms can compete on the basis of price, quantity, technological innovations, marketing, and reputation. However, there are a series of simplified models that attempt to describe market behavior by considering certain circumstances. Some of the better-known models are the dominant firm model, the Cournot–Nash model, the Bertrand model and the model.


Cournot–Nash model

The Nash model is the simplest oligopoly model. The model assumes that there are two "equally positioned firms"; the firms compete on the basis of quantity rather than price and each firm makes an "output of decision assuming that the other firm's behavior is fixed." The market demand curve is assumed to be linear and marginal costs are constant. To find the
Nash equilibrium In game theory Game theory is the study of mathematical model A mathematical model is a description of a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form ...
one determines how each firm reacts to a change in the output of the other firm. The path to equilibrium is a series of actions and reactions. The pattern continues until a point is reached where neither firm desires "to change what it is doing, given how it believes the other firm will react to any change." The equilibrium is the intersection of the two firm's reaction functions. The reaction function shows how one firm reacts to the quantity choice of the other firm. For example, assume that the firm 1's demand function is ''P'' = (''M'' − ''Q''2) − ''Q''1 where ''Q''2 is the quantity produced by the other firm and Q1 is the amount produced by firm 1, and M=60 is the market. Assume that marginal cost is CM=12. Firm 1 wants to know its maximizing quantity and price. Firm 1 begins the process by following the profit maximization rule of equating marginal revenue to marginal costs. Firm 1's total revenue function is ''R''''T'' = ''Q''1 ''P'' = ''Q''1(''M'' − ''Q''2 − ''Q''1) = ''MQ''1 − ''Q''1 ''Q''2 − ''Q''12. The marginal revenue function is R_M = \frac = M - Q_2 - 2 Q_1.RM = M − Q2 − 2Q1. can be restated as RM = (M − Q2) − 2Q1. : ''R''''M'' = ''C''''M'' :M − Q2 − 2Q1 = CM :2Q1 = (M − CM) − Q2 :Q1 = (M − CM)/2 − Q2/2 = 24 − 0.5 Q2 .1:Q2 = 2(M − CM) − 2Q1 = 96 − 2 Q1 .2 Equation 1.1 is the reaction function for firm 1. Equation 1.2 is the reaction function for firm 2. To determine the Nash equilibrium you can solve the equations simultaneously. The equilibrium quantities can also be determined graphically. The equilibrium solution would be at the intersection of the two reaction functions. Note that if you graph the functions the axes represent quantities. The reaction functions are not necessarily symmetric. The firms may face differing cost functions in which case the reaction functions would not be identical nor would the equilibrium quantities.


Bertrand model

The Bertrand model is essentially the Cournot–Nash model, except the strategic variable is price rather than quantity.Samuelson, W. & Marks, S. ''Managerial Economics''. 4th ed. page 415 Wiley 2003. The model assumptions are: * There are two firms in the market * They produce a homogeneous product * They produce at a constant marginal cost * Firms choose prices PA and PB simultaneously * Firms outputs are perfect substitutes * Sales are split evenly if PA = PB The only Nash equilibrium is PA = PB = MC. Neither firm has any reason to change strategy. If the firm raises prices, it will lose all its customers. If the firm lowers price P < MC then it will be losing money on every unit sold. The Bertrand equilibrium is the same as the competitive result. Each firm will produce where P = marginal costs and there will be zero profits. A generalization of the Bertrand model is the
Bertrand–Edgeworth model In microeconomics Microeconomics (from Greek prefix ''mikro-'' meaning "small" + ''economics'') is a branch of economics that studies the behavior of individuals and Theory of the firm, firms in making decisions regarding the allocation of sc ...
that allows for capacity constraints and a more general cost function.


Oligopolistic market: Kinked demand curve model

According to this model, each firm faces a demand curve kinked at the existing price.Pindyck, R. & Rubinfeld, D. ''Microeconomics'' 5th ed. page 446. Prentice-Hall 2001. The conjectural assumptions of the model are; if the firm raises its price above the current existing price, competitors will not follow and the acting firm will lose market share and second, if a firm lowers prices below the existing price then their competitors will follow to retain their market share and the firm's output will increase only marginally. In other words, oligopolist's pricing logic is that competitors will match and respond to any price cut - retaliating to obtain more market share, while they will stick with the current or initial price for any price rising among competitors. If the assumptions hold, then: * The firm's marginal revenue curve is discontinuous (or rather, not differentiable), and has a gap at the kink * For prices above the prevailing price the curve is relatively elasticNegbennebor, A. ''Microeconomics: The Freedom to Choose''. page 299. CAT 2001 * For prices below the point the curve is relatively inelastic The gap in the marginal revenue curve means that marginal costs can fluctuate without changing equilibrium price and quantity, thus, prices tend to be rigid.


Examples

Many industries have been cited as oligopolistic, including
civil aviation Civil aviation is one of two major categories of flying, representing all non-military and non-state aviation Aviation is the activities surrounding mechanical flight and the aircraft industry. ''Aircraft'' includes airplane, fixed-wing and ...
,Adriana Gama, Review of Regulating the Polluters: Markets and Strategies for Protecting the Global Environment by Alexander Ovodenko, ''Global Environmental Politics'', MIT Press, Vol. 19, No. 3, August 2019, pp. 143-145. agricultural
pesticide Pesticides are substances that are meant to control pests Pest or The Pest may refer to: Science and medicine * Pest (organism), an animal or plant detrimental to humans or human concerns ** Weed, a plant considered undesirable * Infectious d ...
s,
electricity Electricity is the set of physical Physical may refer to: *Physical examination, a regular overall check-up with a doctor *Physical (album), ''Physical'' (album), a 1981 album by Olivia Newton-John **Physical (Olivia Newton-John song), "Physi ...

electricity
,Woohyung Lee, Tohru Naito & Ki-Dong Lee
Effects of Mixed Oligopoly and Emission Taxes on the Market and Environment
''Korean Economic Review'', Vol. 33, No. 2, Winter 2017, pp. 267-294: "we have witnessed mixed oligopolistic markets in a broad range of industries, such as oil, electricity, telecommunications, and power plants that emit pollutants during their respective production processes."
and
platinum group metal The platinum-group metals (abbreviated as the PGMs; alternatively, the platinoids, platinides, platidises, platinum group, platinum metals, platinum family or platinum-group elements (PGEs)) are six noble, Precious metal, precious metallic chemica ...
mining.Magnus Ericsson & Andreas Tegen
Brief Report: Global PGM mining during 40 years—a stable corporate landscape of oligopolistic control
''Mineral Economics'', Vol. 29, pp. 29–36 (2016).
In most countries, the
telecommunications Telecommunication is the transmission of information by various types of technologies over wire, radio, Optical system, optical, or other Electromagnetism, electromagnetic systems. It has its origin in the desire of humans for communication ov ...
sector is characterized by an oligopolistic market structure.
Rail freight hauled container freight train on the West Coast Main Line The West Coast Main Line (WCML) is one of the most important railway corridors in the United Kingdom, connecting the major cities of London and Glasgow with branches to Birmingham, Liv ...
markets in the
European Union The European Union (EU) is a political and economic union of member states that are located primarily in Europe Europe is a which is also recognised as part of , located entirely in the and mostly in the . It comprises the wester ...

European Union
have an oligopolistic structure. In the United States, industries that have identified as oligopolistic include
food processing Food processing is the transformation of agricultural products into food Food is any substance consumed to provide nutritional Nutrition is the biochemical Biochemistry or biological chemistry, is the study of chemical processes with ...
,Rigoberto A. Lopez, Xi He & Azzeddine Azzam
Stochastic Frontier Estimation of Market Power in the Food Industries
''Journal of Agricultural Economics'', Vol. 69, Issue 1 (Feb. 2018), pp. 3-17.
funeral service A funeral is a ceremony connected with the Disposal of human corpses, final disposition of a corpse, such as a burial or cremation, with the attendant observances. Funerary customs comprise the complex of beliefs and practices used by a culture to ...
s,
sugar refining . Image:20120526 Suikerfabriek Suiker Unie Hoogkerk Groningen NL.jpg, Sugar refinery in Groningen (city), Groningen, The Netherlands A sugar refinery is a Refining, refinery which processes raw sugar from sugarcane, cane or sugar beet, beets into ...
, , pulp and paper making,
Market power In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of plant ...
and
market concentration Market is a term used to describe concepts such as: *Market (economics) A market is a composition of systems, institutions, procedures, social relations or infrastructures whereby parties engage in Exchange (economics), exchange. While parties m ...
can be estimated or quantified using several different tools and measurements, including the
Lerner index The Lerner index, formalized in 1934 by British economist of Russian origin Abba Lerner Abraham "Abba" Ptachya Lerner (also Abba Psachia Lerner; 28 October 1903 – 27 October 1982) was a Russian-born British economist. Biography Born in Bessara ...
, stochastic frontier analysis, and New Empirical Industrial Organization (NEIO) modeling, as well as the Herfindahl-Hirschman index.


Demand curve

In an oligopoly, firms operate under
imperfect competitionIn economics, imperfect competition refers to a situation where the characteristics of an economic market do not fulfil all the necessary conditions of a perfectly competitive market, resulting in market failure. The structure of a market can sign ...
. With the fierce price competitiveness created by this sticky-upward
demand curve In economics Economics () is a social science Social science is the Branches of science, branch of science devoted to the study of society, societies and the Social relation, relationships among individuals within those societies. ...

demand curve
, firms use non-price competition in order to accrue greater revenue and market share. "Kinked" demand curves are similar to traditional demand curves, as they are downward-sloping. They are distinguished by a hypothesized convex bend with a discontinuity at the bend–"kink". Thus, the first
derivative In mathematics Mathematics (from Greek: ) includes the study of such topics as numbers (arithmetic and number theory), formulas and related structures (algebra), shapes and spaces in which they are contained (geometry), and quantities ...

derivative
at that point is undefined and leads to a jump discontinuity in the marginal revenue curve. Classical
economic theory Economics () is the social science that studies how people interact with value; in particular, the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. ...

economic theory
assumes that a profit-maximizing producer with some market power (either due to oligopoly or
monopolistic competition Monopolistic competition is a type of imperfect competitionIn economics, imperfect competition refers to a situation where the characteristics of an economic market do not fulfil all the necessary conditions of a perfectly competitive market, ...
) will set marginal costs equal to marginal revenue. This idea can be envisioned graphically by the intersection of an upward-sloping marginal cost curve and a downward-sloping marginal revenue curve (because the more one sells, the lower the price must be, so the less a producer earns per unit). In classical theory, any change in the marginal cost structure (how much it costs to make each additional unit) or the marginal revenue structure (how much people will pay for each additional unit) will be immediately reflected in a new price and/or quantity sold of the item. This result does not occur if a "kink" exists. Because of this jump discontinuity in the marginal revenue curve,
marginal cost In economics Economics () is a social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behavio ...

marginal cost
, s could change without necessarily changing the price or quantity. The motivation behind this kink is the idea that in an oligopolistic or monopolistic competitive market, firms will not raise their prices because even a small price increase will lose many customers. This is because competitors will generally ignore price increases, with the hope of gaining a larger market share as a result of now having comparatively lower prices (price rigidity). However, even a large price decrease will gain only a few customers because such an action will begin a
price war Price war is "commercial competition characterized by the repeated cutting of prices below those of competitors". One competitor Competition arises whenever two or more parties strive for a common goal A goal is an idea of the future or ...
with other firms. The curve is, therefore, more price-elastic for price increases and less so for price decreases. Theory predicts that firms will enter the industry in the long run since market price for oligopolists is more stable or 'focal' in the long run under this kinked demand curve situation.


See also

*
Big business Big business involves large-scale corporate-controlled financial Finance is a term for the management, creation, and study of money and investments. Pamela Drake and Frank Fabozzi (2009)What Is Finance?/ref> Specifically, it deals with the ...
* Conjectural variation *
Market failure In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where indivi ...
*
Monopoly A monopoly (from Greek#REDIRECT Greek Greek may refer to: Greece Anything of, from, or related to Greece Greece ( el, Ελλάδα, , ), officially the Hellenic Republic, is a country located in Southeast Europe. Its population is approxi ...

Monopoly
*
Monopsony In economics, a monopsony is a market structure in which a single buyer substantially controls the market as the major purchaser of goods and services offered by many would-be sellers. The Microeconomics, microeconomic theory of monopsony assumes a ...
* Oligopolistic reaction *
Oligopsony An oligopsony (from Greek#REDIRECT Greek Greek may refer to: Greece Anything of, from, or related to Greece Greece ( el, Ελλάδα, , ), officially the Hellenic Republic, is a country located in Southeast Europe. Its population is approx ...
*
Perfect competition In economics Economics () is a social science Social science is the branch A branch ( or , ) or tree branch (sometimes referred to in botany Botany, also called , plant biology or phytology, is the science of plant ...
*
Prisoner's dilemma The prisoner's dilemma is a standard example of a game analyzed in game theory Game theory is the study of mathematical models of strategic interaction among Rational agent, rational decision-makers.Roger B. Myerson, Myerson, Roger B. (1991) ...
*
Simulations and games in economics education A simulation game is "a game with separate sliding drawer, from 1390–1353 BC, made of glazed faience, dimensions: 5.5 × 7.7 × 21 cm, in the Brooklyn Museum (New York City) '', 1560, Pieter Bruegel the Elder File:Paul ...
*
Swing producerSwing producer is a supplier or a close oligopolistic An oligopoly (from Greek Greek may refer to: Greece Anything of, from, or related to Greece Greece ( el, Ελλάδα, , ), officially the Hellenic Republic, is a country located in South ...
*
Unfair competition Unfair may refer to: * The negative form of the adjective ''fair A fair (archaic: faire or fayre) is a gathering of people for a variety of entertainment or commercial activities. It is normally of the essence of a fair that it is temporary wit ...


Notes


References


Further reading

* Bayer, R. C. (2010)
Intertemporal price discrimination and competition
''Journal of economic behavior & organization'', ''73''(2), 273–293. *Harrington, J. (2006). Corporate leniency programs and the role of the antitrust authority in detecting collusion. ''Competition Policy Research Center Discussion Paper, CPDP-18-E''. *Ivaldi, M., Jullien, B., Rey, P., Seabright, P., & Tirole, J. (2003). The economics of tacit collusion. {{Authority control Market structure