Oligopolistic competition is a market model in which a small number of enterprises dominate. In the event that there are only two participants in economic relations, the term "duopoly" is used.
Well-known competition models
In accordance with the number of participants, economists distinguish the following types of competition: pure, oligopolistic, monopolistic. Pure competition is characterized by a large number of participants who are actively fighting for the consumer. In the case of a monopoly, this or that industry is represented by only one subject. If we talk about oligopoly, the number of market participants is limited.
Characteristic oligopolistic competition
Oligopoly means working in the market of a limited number of firms. Their number usually ranges from 1 to 10. This market model is characterized by the following features:
- a large number of buyers, for the tendency of which a small number of companies are struggling, providing the bulk of the supply;
- in most cases, oligopolistic competition is concentrated around homogeneous products, and in the case when they are differentiated, an aggregation operation is performed for the convenience of research;
- there are many significant obstacles and barriers to entering the market;
- in view of the interdependence of enterprises constituting an oligopoly, external price control is extremely limited;
- when determining the value of a product or service, there is the possibility of collusion between entrepreneurs;
- if one or several firms are characterized by a large market share, then they can influence pricing.
Positive and negative sides of oligopoly
Oligopolistic competition is characterized by the following positive aspects:
- firms working within the framework of this model pay great attention to financing and conducting research and development work;
- due to the fact that mainly non-price methods of competition are used, over time the product range differentiates.
If we talk about the negative aspects of such a phenomenon as the market of oligopolistic competition, we can distinguish the following:
- in view of the high probability of a price and production collusion, the oligopoly may acquire the features of a monopoly;
- quite rarely, price reduction due to economies of scale is practiced;
- the use of non-price competition methods forces oligopolists to resort to additional costs, which increases the cost of goods;
- since firms have the ability to closely contact each other, regulation of their activities from the outside becomes almost impossible;
- quite common is a situation where manufacturers do not work to reduce costs, but seek to cover them by increasing the cost of goods.
The main forms of business combination
We can say that the oligopolistic market is similar to the market of monopolistic competition. This becomes especially noticeable in a situation where enterprises are concentrated in various kinds of associations, which can take the following forms:
- the trust implies the union of organizations producing homogeneous products, as a result of which members completely lose economic independence;
- a syndicate is created to sell products through common channels;
- a cartel implies an agreement on output volumes and pricing policies, which can be either public or unwritten;
- the consortium is created for a certain time until the set common goal is achieved;
- conglomerate combines firms with diverse production while maintaining relative independence;
- The concern was created for joint activities of diversified firms that have common or similar economic interests;
- Holding is an association in which the governing body controls the activities of enterprises, but does not engage in production work itself.
Cartel model
Oligopolistic competition models are distinguished by the presence or absence of coherence between the actions of firms operating under this mechanism. If we talk about cartels, we mean an agreement (conspiracy), which implies a coordination of the volume and range of products, as well as pricing policy. As a result, enterprises are given the opportunity to receive the same benefits from their activities as in the case of the monopoly.
Since the cartel is illegal, entrepreneurs are trying to give it the status of a state or international organization (for example, OPEC). But taking into account that over time, each of the participants strives to obtain even greater benefits, the association quickly disintegrates.
Leadership model
Oligopolistic competition does not imply equality of market participants. Each of them seeks to stand out in one way or another in order to occupy the highest positions. The leader has the opportunity to set the pace of production, as well as the introduction of new technologies. It is also about raising or lowering the price. As for the rest of the market participants, they can only respond to the actions taken by the leader.
Cournot Model
If we talk about this model, it is worth noting that the leadership of each organization certainly compiles forecasts of market development, as well as the activities of competitors, in accordance with which further activities are built. In the process of functioning, certain adjustments are made, as a result of which each company takes a certain share in the market. In the future, these proportions are saved.
Price war
It is quite natural that each of the enterprises operating in the oligopolistic market seeks to occupy a leadership position using all available methods of competition. One of the most effective is to lower prices. Further, all other firms begin to respond symmetrically. This is a price war. Cost reduction occurs until weaker firms close and the market turns into a monopoly with one participant.
Oligopolistic competition - examples
If we talk about oligopoly, then the most striking example can be considered the electrical market. At the very beginning of the development of scientific and technological progress, manufacturers tried to agree on how much and at what price products would be produced. At the moment, each of the manufacturers of electronics is trying to break ahead through the development of advanced technologies. But if we talk about pricing policy, we can see that the price range of homogeneous goods has a relatively small scatter, which gives the right to talk about collusion.
Also an example of an oligopoly can be the sphere of production of vehicles. We can talk about both airplanes and cars and other objects. It is worth noting that there are significant barriers to entering this industry. They consist in the availability of a certain material and technical base, which will make it possible to produce a complex and competitive product. If we talk about the number of market participants, their number is limited.
findings
Oligopolistic competition is a market situation when a strictly limited number of firms operate. Their number ranges from 2 to 10. At the same time, it is worth noting that there are significant restrictions on both entering and leaving the industry. Also, this model is characterized by a high probability of collusion regarding the range of products, their volume and pricing policy. In this case, the market situation becomes like a monopoly.
The situation in the oligopolistic market can develop according to several scenarios that correspond to several well-known models. The most common is the cartel, which involves the organization of price and volume conspiracy. Given that such activities are illegal, over time they will be given official status. There may also be a leadership model. We are talking about the fact that in the oligopoly there is an enterprise that is the first to resort to technological, assortment and price changes. Competitors have no choice but to react symmetrically.
The Cournot model refers to the fact that enterprises earn certain market shares, after which the situation remains unchanged. As for the price war, then enterprises alternately lower prices in order to increase sales. As a result, many of them go bankrupt, and only one remains, which becomes a monopolist.
