Question

Why do oligopolies exist? List five or six oligopolists whose products you own or regularly purchase. What distinguishes oligopoly from monopolistic competition?

Short answer

Oligopolies exist due to high entry barriers; examples include Apple and Samsung. Oligopolies have few large firms, while monopolistic competition has many small firms with differentiated products.

Step-by-step solution

Identify the Existence of Oligopolies

Oligopolies exist due to high barriers to entry, which could include significant startup costs, control of essential resources, economies of scale, and regulatory hurdles. This results in a market dominated by a few large firms, allowing them to control prices and output.

List Examples of Oligopolists

Common oligopolists include major smartphone companies like Apple and Samsung, car manufacturers such as Ford and Toyota, and telecommunications providers like Verizon and AT&T. These companies operate in markets with limited competitors and significant market influence.

Explain Characteristics of Oligopolies

In an oligopoly, firms are interdependent and often rely on strategies to remain competitive, such as collaboration or collusion, pricing strategies, or introducing new products. Product differentiation might exist, but it's not as pronounced as in monopolistic competition.

Define Monopolistic Competition

Monopolistic competition is characterized by many firms offering products that are similar but not identical, leading to significant product differentiation. Entry barriers are low, allowing new firms to enter the market easily.

Contrast Oligopoly with Monopolistic Competition

The key distinction between oligopoly and monopolistic competition is the number of firms and the level of market power. Oligopolies have fewer, larger firms with greater control over prices, whereas monopolistic competition consists of many firms with less market control and more focus on product differentiation.

Key concepts

Barriers to Entry

In the world of microeconomics, barriers to entry play a crucial role in the formation of oligopolies. These barriers make it challenging for new firms to enter an industry or market, keeping it dominated by a few large firms.
High barriers to entry can be in various forms:

• Significant startup costs: Establishing a business in certain industries can require a substantial initial investment.
• Economies of scale: Larger firms can produce goods more cheaply per unit due to their size and efficiency, making it hard for smaller, new entrants to compete.
• Control of essential resources: If existing firms control resources necessary for production, it's difficult for new companies to enter.
• Regulatory hurdles: Laws and regulations may impose restrictions or require expensive compliance measures that deter new firms.

All these factors help maintain the status quo in an oligopoly, preventing new competition and reinforcing the dominance of existing players.

Product Differentiation

Oligopolies can also involve some level of product differentiation, though it's typically more subtle compared to monopolistic competition.
Product differentiation refers to how firms in a market attempt to distinguish their products from those of competitors.
This doesn't just mean differences in the product itself, but can also be about how the product is marketed or branded.

• Branding and advertising: Firms may focus on creating strong brand identities through advertising efforts to foster customer loyalty.
• Quality and features: Sometimes, differentiation is achieved through slight variations in product quality and additional features.
• Customer service: Improved customer services can also act as a differentiating factor that attracts consumers to a particular brand.

The degree of differentiation is typically not as wide as in monopolistic competition, where products are more varied. However, in oligopolies, even small differences can have significant market impacts.

Interdependence Among Firms

Interdependence is a key characteristic of oligopolistic markets. This is where each firm must take into account the actions and responses of its competitors when making decisions.
Why does this happen?

• In oligopolies, because there are only a few firms, each one holds a significant chunk of the market.
  The actions of one firm, like changing prices or introducing a new product, can greatly impact others.
• To compete effectively, firms might engage in strategic behaviors such as pricing strategies, where they may lower prices to gain market share.
• Firms might also look for ways to collaborate, which can sometimes lead to collusion to set prices or restrict output to maximize joint profits.

These interactions make the market quite dynamic, often leading to higher levels of strategic planning and decision-making among the firms involved.