Competitive Oligopolies

Oligopolistic markets A significant portion of the market share owned and operated by a few large firms. High barriers to entry. Product differentiation usually done using branding. Considerable interdependence in decision-making. Non-price based competition. Oligopolistic markets The UK Petrol Market.

Collusion is the act of secret or illegal cooperation and conspiracy Collusion is the act of secret or illegal cooperation and conspiracy. It is a common feature of an oligopolistic market wherein the large, dominant firms collude with each other in order to increase their profits usually by fixing higher prices. Consumers are forced to continue buying the product as it may be difficult to find a cheaper substitute. However oligopolistic markets can exist without collusion. The main feature of this market is the uncertainty by which other dominant firms in the oligopoly would react to an action of one dominant firm. This is referred to as a non-collusive (competitive) oligopoly. Collusion

Difference between non-collusive and collusive oligopolies Non-Collusive (Competitive) Oligopolies Large number of firms in the market. A relatively less concentrated oligopoly. Relatively lower barriers to entry. One firm with a significant cost advantage. Homogenous goods. Saturated markets. Strict government regulations. Collusive Oligopolies A relatively lesser number of firms. Relatively higher barriers to entry. All firms have similar cost structures. Ineffective competition policies. Consumer loyalty. Consumer inertia.

The kinked demand curve Follows a dual demand curve. When the price is risen, other firms will not follow – fall in revenue. When the price is reduced, other firms will follow – fall in revenue. Marginal revenue curve splits into three different curves due to the steep fall at the kink. The kinked demand curve

Evaluation of competitive oligopolies Competitive oligopolies use one of the two methods: Price-based competition: Firms try to undercut each other in the market. Is bad for the firm due to the fall in prices leading to lower levels of profit. However, it is beneficial to the consumer as the products becomes cheaper. Non-price competition: This is usually done by building a base of loyal customers through advertising or improving quality of services. For the firm, it is generally better than price-based competition as they don’t have to worry about reducing prices. However, it may not benefit the consumers as firms tend to raise prices in order to cover the rise in costs due to advertising etc.