Oligopoly

Oligopoly can be defined as markets formed by a few number of producers who sell similar or identical products, the oil market would justify this. The oligopoly market is one which is very difficult to enter. On many occasions only two organisations will dominate the market this is known as a duopoly i.e. the UK mobile phone market is dominated by Vodaphone and Cellnet. The characteristics of an oligopoly market are interdependent between firms because of the small number of competition between firms; organisations have to consider how its actions will affect the decisions of its competitors. Any action by one organisation will solicit a response from its competitors. Pricing decisions will be copied by competitors, with effect of reducing profits for all organisations.

Prices are generally determined through either price leadership or some sort of collusion. Price leadership is where normally one firm sets the price and others follow. Leadership normally depends on the firm’s power and not the lowest cost on the market, this leaves firms open to setting prices at the high rates unlike a competitive market. Collusion on the other hand is now illegal in many countries but that doe not mean it is not used, it is where an explicit or implicit agreement between firms on prices so competition is reduced.

An oligopoly market lacks price competition as firms are very reluctant to increase their prices in case competitors do not follow and they will lose market shares or decrease prices resulting price wars and as a consequence prices maybe reduced but leaves market shares unchanged leaving everyone worse off.

The Kinked demand curve was introduced by Paul Sweezy in 1939, through this model he tried to explain the price ridged that occurred in an oligopolistic market. His explanation was that oligopolistic markets price competition was too rigid and as a result according to Sweezy, oligopolies face a demand curve that has a kink at the...