A few large companies, and a few small companies. The competition still exists a

Question

A few large companies, and a few small companies. The competition still exists amongst these firms in terms of product/ service, etc. What one firm does will impact the others. Entry and exist into these industry is difficult. Why? Because economies of scale has been established all ready...making it VERY expensive for other firms to enter into the industry. ---A branch of oligopoly is called a Cartel--- Same attributes of a oligopoly, however, there is now cooperation within the firms (cooperation with output, marketing, distribution and marketing).

Explanation / Answer

Oligopoly is the market category in which we have sellers competing with each other. Oligopoly differs from other market categories in that, under monopoly we have only one seller, under perfect competition we have many sellers, under monopolistic competition we have a sufficiently large group of small monopolist whereas under oligopoly we have few sellers constituting a small group.. In an oligopolistic market the firms may be producing either homogenous or differentiated products. Besides, the element of interdependence among rival firms in the group makes it difficult for us to have a general theory of the oligopoly. in oligopoly the action of one firm depends not only on the reaction of the consumers but also on the reaction of the rival firms. Thus, decision making becomes a complicated phenomenon. Before a firm makes any decision it has to take into account the probable reaction of the rival firms.

The most important feature of the oligopoly is the interdependence in decision making of the few firms which comprise the industry. This is because when the number of competion is few, any change in price, output, product etc. by a firm will have a direct effecton the fortune of its rivals, which will then retailiate in changing their own prices, output or products as the case may be. It is therefore, clear that the oligopolistic firm must consider not only th emarket demand for the industry's product but also the reactions of the other firms in the industry to any action or decision it may take. Since more than one reaction pattern is possible from the other firms, we have to make some assumptions about the reactions of the others before we can provide a definite determinate solution to price-output fixation under oligopoly. A direct effect of interdependence of oligopolists is the various firms have to employ various aggresive and defensive marketing weapons to gain a good deal of costs on advertising and on other measures of sales promotion. Therefore, thre is a great importance of advertising and selling costs in conditions of market situations characterised by oligopoly.

One of the essential features of oligopoly is the difficulty on the part of new firms to enter the market. Entry barriers resulting from mergers, ownership and control of key factors of production and the advantage of having been established and enjoying scale economies are significant element in maintaining the dominance of the exisiting few firms in the oligoplolistic market. Also advertising and selling costs are of strategic importance to oligopolistics.. To quote baumol "It is only under oligopoly that advertising comes fully into its own".

Often we find that there is a tacit agreement among the oligopolists. Under tacit agreement without any face to face contact, consultation or discussion they come to have some understanding between themselves and pursue a uniform policy with regard to price, output etc. In order to avoid uncertainlty arising out of interdependence and to avoid price ars and cut throat competition, firms working under oligopolistic conditions often enter into agreement reagrding unfirom price-output policy to be pursued by them. The agreement may be either formal (open) or tacit (secret). bust since formal or open agreements to form monopolies are illegal in most countries, agreements reached between oligopolists are generally tacit or secret. When the firms enter into such collusive agreements formally or secretly collusive oligopoly prevails. Collusions are of two types--cartels and price leadership.

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