By Christina Barr Oligopoly

A market form in which an industry is dominated by a small number of large scale producers. Because of their smaller numbers, each has a considerable amount of control on pricing. With this they must consider the actions and reactions of their rivals to new prices, advertisement, and output. Homogenous Oligopoly- Produce standardized products Differentiated Oligopoly- Produce different products Characteristics and Explanation

Several means are used to measure the degree to which oligopolistic industries are concentrated in the hands of their largest firms. Most commonly used are concentration ratios and the Herfindahl Index. Concentration Ratios- Percentage of total output produced and sold by an industry’s largest firms. Unfortunately these ratios are not affective on the following… Localized Markets- Concentration ratios pertain to the nation as a whole where the markets for some producers are highly localized due to the expense of transportation. Interindustry Competition- The competition between two products associated with different industries. World Trade- Concentaion may be over stated if import competition of foreign suppliers is not accounted for. Herfindahl Index- The sum of the squared percentage market shares of all firms in the industry. (%S1)^2 +(%S2)^2+(%S3)^2+…+(%Sn)^2 Addresses the issue of a 100% ratio concentration from two firms that do not actually hold the same market power. Degree of Industry Concentration

Game-Theory Model and Collusion Game- theory analyzes the pricing behavior of Oligopolists since it reflects the characteristics used in strategic games like chess, poker, and bridge. All of which the way one plays depends upon the actions and reactions of their opponent. Collusion on the other hand is the act of a firm operating with it’s rivals which sometimes proves to be more beneficial.

An industry made up of multiple independent firms that each have an equal position in the market but for a differentiated product. This leads to a “kinked demand curve” where the slope of the demand curve depends on if rivals match or ignore price changes. Noncollusive Oligopoly

Cartel- A group of producers that typically produces a formal written agreement specifying how much each member will produce and charge. Covert- Collusion where firms try to hide the results of their conclusions. Usually to avoid detection from regulators. Overt- Collusion where firms make no attempt to hide agreements. Tactic- Collusion where firms act together with no formal or informal agreement. Cartels and Other Collusion

Price leadership entails a type of implicit understanding by which Oligopolists can coordinate prices without engaging in out right collusion based on formal agreement and secret meetings. The price leader is likely to observe infrequent price changes, communications, and limited pricing. Price leadership sometimes breaks down and results in a price war. Price Leadership Model

Positive- Low cost means of providing info to customers. Diminishes monopoly power by enhancing competition resulting in great economic efficiency. Negative- Some advertising is based on misleading and extravagant claims that confuse the consumer. The advertising may increase sales on inferior products and cause a drop in price on better quality goods that the consumer misses out on. Firms establish brand name loyalty and thus achieve monopoly power via advertising. Eventually the consumers will lose power along with the benefits of a competitive market. Advertising (positive vs. negative)

Oligopolists sustain stable economic profits year after year meaning price exceeds marginal cost and average total cost. In an oligopoly neither allocative or productive efficiency can be reached. Efficiency of the Oligopoly