Oligopoly is a type of market structure close to monopoly. In accordance with this concept, a limited number of entrepreneurs are engaged in the sale of goods or services. At the same time, the appearance of someone new in this market is almost impossible. It would seem that everything is clear, but there are various models of oligopoly that also deserve attention.
The main signs of oligopoly
Different markets have their own distinguishing features. So, the conditions of the oligopoly model are as follows:
- market shares are distributed among a small number of enterprises;
- the product can be both homogeneous and differentiated;
- the entry of new players into the industry, although strictly limited, is not completely blocked, as is the case with the monopoly;
- the share of each manufacturer in the market is so large that they can pursue an independent pricing policy;
- all decisions regarding the volume of production and other significant issues are not made without evaluating a possible reaction from competitors.
Stackelberg Model
When considering oligopoly models, first of all it is worth paying attention to the Stackelberg model. It implies the presence of information asymmetry in the market. The behavior of entrepreneurs can be compared with a dynamic game, which is carried out on the basis of complete and perfect information. The peculiarity of this model is that there is some kind of leading company that sets the tone in production volumes and pricing policy, while the rest can only be guided by these indicators.
Cournot Model
Studying oligopoly models, one of the key places should be given to the Cournot concept. According to her, there is market competition that complies with the following provisions:
- in market conditions, a fixed number of enterprises (more than one) operate that produce products or provide services of the same name;
- Entrance and exit of firms is strictly blocked;
- each of the entrepreneurs has a certain market power (it is worth noting that this term appeared much later than the Cournot theory);
- each of the companies seeks to maximize its profit, and therefore no association in cooperation occurs;
- for each of the firms, the competitor's output is considered constant;
- costs for different enterprises may be different, but their indicator is known to all;
- the model of a broken demand curve "Oligopoly" decreases, depending on the price of a product or service;
- industry supply is equal to demand, and therefore the cost of goods is equilibrium.
Bertrand Model
Oligopoly models have been reviewed by various scientists and researchers. So, according to Bertrand, this situation in the market implies price competition. Firms are trying to win by changing the value of their products or services. In this case, a paradox is formed (which, incidentally, received the name of the author of the model - Bertrand). Enterprises will be forced to set a price that covers marginal costs, which is also characteristic of perfect competition. According to Bertrand, one can distinguish such varieties of oligopolies:
- one-time - enterprises operating in the market produce non-deferred products;
- heterogeneous - firms produce different types of products;
- oligopoly of dominance - one large company dominates the market, releasing 60% of the total output, and the remaining players share the remaining market segment;
- duopoly - the market for the production of a particular product belongs to only two firms.
Price leadership
Considering price oligopoly models, it is worth starting with price leadership. This refers to a market situation where the change in price by a company that dominates the industry is supported by most other manufacturers. Thus, oligopolists can adjust pricing in the market without entering into any contractual relationship. A leading company adheres to these basic rules:
- price adjustments are made in rare cases when significant changes occur in the industry with respect to demand and costs;
- the leader informs in advance about the change in value in order to obtain informal consent of all other participants in the oligopoly;
- when setting a new price, the leader focuses not on maximizing profits, but on preventing the emergence of new players in the industry.
Cost Plus
Considering the main models of oligopoly, it is worth paying attention to the concept of "costs plus". To begin with, it should be noted that there are conditions for a contract for the supply of goods or the provision of services at cost with an additional fee that is equal to a certain percentage of the costs. This is due to the fact that costs cannot always be estimated in advance. For example, if it is impossible to determine the exact scope of work in advance, it is impossible to determine the final cost of the supplied material. But usually oligopolists try to avoid such a scheme, because of its disadvantage.
The traditional theory of the economic consequences of oligopoly
Regardless of which model of the oligopoly market is considered, it is important to evaluate the economic consequences and effectiveness of a given market situation. To begin with, it is worth considering the traditional point of view, which can be described by the following provisions:
- oligopolists set the volume of output and price of products together, and therefore the market situation is approaching absolute monopoly;
- the volume of production is quite small (below the optimal level), and the prices for products and services are an order of magnitude higher than in conditions of perfect competition;
- when united in cartels, a group monopoly arises, which can be considered economically inefficient;
- those models in which the competitive moment is nevertheless present, are inherent in all the shortcomings of the market of imperfect competition;
- oligopolists have significant market power, which gives the situation all the difficulties of monopolistic competition in a more pronounced form.
Schumpeter-Galbraith Theory
A limited number of players in the market implies oligopoly. Behavioral patterns do not contribute to the efficient allocation of resources, which is why there is much debate among economists about the economic efficiency of the oligopoly. In particular, this issue is considered from the point of view of scientific and technical progress and the introduction of innovative technologies. Most researchers agree that only large players in the market can provide scientific and technical progress at the expense of significant financial and intellectual resources. At the same time, a significant amount of profit is guaranteed, since the entrance to the industry for other participants is blocked. Part of the income can be redistributed to R&D. Nevertheless, if we compare this theory with the real picture, it becomes clear that even small firms or independent inventors can make a significant contribution to scientific and technological progress.
Maximizing the profit of an oligopolist
The oligopoly market model is a model in which a strictly limited number of firms operate. Moreover, the main goal of each of them is to maximize profits. The main problem is that you have to constantly take into account the changes introduced by competitors in your work process. Unlike other market models, in an oligopoly, industry participants are interdependent on each other's strategies.Thus, the following statements will be true:
- the firm cannot consider the demand curve for its product or service as a given condition;
- there is no predetermined marginal revenue curve, because it can vary, depending on the behavior of competing structures;
- based on the two previous provisions, we can conclude that there is no equilibrium point.
In connection with all of the above, the conclusion suggests itself that in order to attract new customers, the oligopolist should use non-price methods. It is about the following:
- emphasis on product differentiation, so that a wide range of products distinguishes the company from competitors;
- increase in the quality of goods, as well as after-sales service;
- continuous improvement of technical characteristics of products, which is achieved due to new scientific and technical developments;
- the provision of credit or installment plans on favorable terms;
- improving the design of the product and its packaging, which will make the brand popular and recognizable;
- extension of warranty service;
- emphasis on advertising technology and active sales promotion.
Game theory in the behavior of oligopolists
Game theory is a mathematical method aimed at studying optimal strategies. If we talk about the game, then it should be understood as a process in which two or more participants are fighting for the realization of their own interests. Moreover, each side has its own specific goal and strategy for achieving it, which can be both winning and losing in relation to the behavior of other players. This theory helps to choose the best mechanism of activity, taking into account the possible actions of other participants and their resource component.
Regarding the oligopoly model, it is worth saying that each particular company implements the optimal strategy based on the actions of other industry participants. By default, it is assumed that all oligopolists will behave in a similar way. This concept was developed and formulated by J. Nash ("Nash Equilibrium"). The main condition for this balance is that all players will mirror each other's actions.
Forms of concentration of organizations
In the oligopoly, it is often possible to observe organizational and economic associations of enterprises in order to concentrate efforts to maximize profits. Here are the most common ones:
- Trust - participants create a single production chain and completely lose their economic independence.
- Syndicate - homogeneous products are sold through a common distribution network.
- Cartel - an agreement on volumes, prices and target markets.
- Consortium - a temporary concentration for the implementation of a specific project.
- A concern is an association of enterprises that have different specializations and common economic interests.
Conclusion
The typology of oligopoly models is related to pricing, production activities, as well as behavior relative to other market players. This form of coexistence of organizations contains the advantages and disadvantages of absolute monopoly and imperfect competition.