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Anoligopolyisamarketstructureinwhichafewlargefirms,eachwithahighdegreeofmarket
sharedominatetheindustry.Pricestabilityexistsinoligopolisticmarketseitherbecausefirms
colludeandfixpricestoeliminatecompetition,orduetothekinkeddemandcurveofthe
noncollusiveoligopoly.
Firmsinoligopolisticmarketsmostlytendtobemutuallyinterdependent.Thismeansthatdueto
thesmallnumberoffirmspresent,decisions
takenbyonefirmaffecttheotherfirmsintheindustry,hencetheydependononeanother.If
onefirmchangesitsbehaviour,theothersfollowsuit.Firmsarekeenlyawareoftheactionsof
theirrivals.
Anoncollusiveoligopolyexistswherefirmsintheindustryactstrategicallybycompeting
independently,takingintoaccountthepossibleactionsofrivalfirms.Thekinkeddemandcurve
modelexplainsthepricestability,asfirmsdonotfixorcoordinateprices.
Ascanbeseeninthediagram,oligopolisticfirmsareprofitmaximising,asshownbytheshaded
area.FirmsproduceatQ1andsellatP1.Duetotheassumptionsofmutualinterdependence,
andasymmetricinformation,thereisakinkinthedemandcurve.
Iftherearethreefirmsinamarketandoneofthemconsidersapricechange,beforechanging
itsprice,itwillanalyseandpredictastohowtheothertwofirmswillreact.Ifthefirmdecidesto
increaseitsprice,theotherfirmswillcontinuetosellatP1,notfollowingthatfirm.Insteadmore
customerswillchoosetobuyfromthefirmswiththelowerprice.Andhencethefirmthat
increasesthepricewilllosemarketshare.ThisisbecausethedemandcurvebeyondpointP1
isrelativelyelastic.Thissuggeststhatevenasmallincreaseinpricewilldecreasethequantity
sold,hencepricesarerarelyincreased.
Ontheotherhand,ifonefirmdecidestodecreasetheprice,otherfirmswillfollowsuit.Theywill
alsodecreasetheirpricesbecause,ifnot,thefirmwiththelowestpricewillgetthemarketshare
oftheothertwofirms,makingtheothersworseoff.However,ifallfirmsreduceprices,the
demandcurvebelowP1isinelastic,implyingthatevenalargepricedecreasewillonlyresultin
asmallincreaseinquantitysold.Therefore,itisbeneficialforallfirmstokeeppricesstable.
Collusiveoligopoliesalsohavestablepricesbecause,thefewlargefirmsdominatingthe
market,cometogetherandfixprices,formallyorinformally.Thisallowsallthefirmstobenefit,
astheyreabletochargehighpricesandbecomeprofitmaximisers,atthesametimeproduce
lessandeliminateallformsofcompetition.
AnexampleofanoligopolisticmarketisSingaporestaxiindustry.Sixlargefirmsdominatethe
market.Thepricestendtobeverystableasmostfirmschargesimilarfareprices.Anyprice
changesinitiatedbythemarketleader,allotherfirmstendtofollowsuit.Thisisalsovisiblein
thesmartphoneindustry,wherefirmslikeAppleandSamsungchargesimilarpricesfortheir
smartphones.
Oligopolistsoftenpossesstoomuchmonopolypower.Evaluatewhether
governmentsshouldinterveneinoligopolisticmarkets.
Oligopolieshaveafewlargefirmswhichdominatetheindustry.Oftentimesoligopoliespossess
monopolypowerwhichiswhenallfirmscometogether,thatistheycollude,hencebehaving
likeonelargefirm.Whenfirmsengageinanticompetitivebehaviour,governmentsshould
intervene,asthiscouldharmthirdpartiessuchasconsumers.
Mainlyacollusiveoligopolyisonethatbehaveslikeamonopoly.Whenfirmscometogetherand
fixprices,theyeliminatecompetition.Oncecompetitioniseliminatedallfirmscanenjoyhigh
profits,makingthemallprofitmaximisers.Quotasonquantitieseachfirmsellsisalsoset.
Ascanbeseenfromthediagram,tomaximiseprofits,firmswillsellatthepointwhereMC=
MR,whichisQpmandchargethepricePpm.Ascanbeseen,thequantityislesserthanmarket
equilibriumandpriceishigherthanequilibrium.Averagecostsarelow,henceprofitcanbe
earned,asshownintheshadedarea.Theprofitsareequallysharedamongstcolludingfirms,
andquantityissplitamongstfirms.Inthecaseofcollusion,governmentsmustintervene.
Firstly,whenoligopolistsarebehavingasmonopolies,consumersarethefirstonestobe
exploited.Consumersloseoutthemostbecausetheyenduphavingtobearhighprices,
especiallyiftherearenosubstitutes.Furthermore,consumersurplusdeclinesgreatly.Itrather
becomespartoftheproducersurplus.Thiscreatesinequalityanddisparityinthedistributionof
income.Inaddition,whenfirmsbehavelikemonopolies,theybecomeallocativelyand
productivelyinefficient.Inpursuitofhigherprofits,firmchargehigherpricesandrestrictoutput.
AlsotheylackincentivetoproduceatthelowestpointofAC.Alsoduetohighbarriersofentry,
itisverydifficultfornewfirmstoenterthemarkets.Hence,itiscrucialforgovernmentstotake
actioninordertopreventexploitation.
Whenfirmsexploitmarketpowerandactagainstpublicinterest,governmentsthroughpolicies
canbreakmonopolypower.Forexampleagovernmentcanstopthemergeroftwolargefirms,
ifthemergewillnotbebeneficialforthepublic.Also,inmostcountriesgovernmentshavemade
theformationofcartelsillegal,soanyformofcollusionthatoccursismerelysecretive.
Furthermore,governmentscanintroducepricecontrols,bysettingmaximumprices.Thisisto
preventfirmsfromcharginghighpricestoconsumers.Inaddition,governmentsoftenchooseto
supportsmallerfirms,forexamplebygivingthemgrantsandsubsidies.
However,therearedrawbacksofthegovernmentinterveninginthemarkets.Firstlymonopoly
powers,sinceareprofitmaximisers,haveaccesstolargeamountsoffinancialresources.They
areabletoinvestinresearchanddevelopmentprojects,andtheyareabletogeneratenew
ideasandproducts.Furthermore,oligopolisticfirmstendtoenjoyhugeeconomiesofscaleas
theyoperateonalargescale.
Inconclusion,itdependsoneachindustry.
Explainhowbusinessspendingonresearchanddevelopmentand
governmentexpenditureoninfrastructuremightshiftthelongrunaggregate
supplycurve.
Aggregatesupplyistheamountofrealnationaloutputthatfirmsarewillingandabletoproduce
ateachpricelevel.Accordingtothenewclassicalmodel,thelongrunaggregatesupplyis
verticalatthefullemploymentlevelofoutput.theLRASisindependentofthepricelevel,asthis
representsthemaximumlevelofnationaloutputoftheeconomypertimeperiod.Thequantity
andqualityofnaturalresources(factorsofproduction)affecttheLRAS.
Researchanddevelopmentiswhenfirmsspendinimprovingtheirproductsorservices.Or
wheninvestmentsaremadetoimprovetechnologyasmeansofincreasingproductivecapacity.
Infrastructureareessentialservicessuchasroads,buildings,powersuppliesetcthatare
importantforincreasingefficiencyofeconomicactivity.Theseareprovidedbythegovernment.
InvestinginR&Dandinfrastructurearecrucialtoacountryseconomy.Theyfostereconomic
growth.Theimprovementinthequantityandqualityofthefactorsofproductionincreasesthe
productivecapacityoftheeconomy.Sustainableeconomicgrowthonlyoccurswhenthereisa
shiftintheLRAScurve.
Ascanbeseeninthediagram,ashiftintheLRAScurvesuggeststhateconomicgrowthhas
beenachieved.Thisgrowthissustainableastheeconomyisnowcapableofproducingmore
outputthanbefore.
Firmsspendonresearchanddevelopmentandthisimprovesthequalityofphysicalcapitalsuch
asmachineries.Longterminvestmentsindevelopingnewtechnologiesimprovework
processesandenhanceefficiency,increasingtheproductivecapacity.Withmorefasterand
efficienttechnologyfirmsareabletoproducelargerquantitiesofoutput,whichresultsinthe
shiftoftheLRAS.Forexample,R&Dhaveallowedfortheautomationinthecarindustry,vastly
improvingtheproductionofcars.Wirelesstechnologieshaveallowedcommunicationand
operationstoimproveattheworkplace.Innovationhaveledtothedevelopmentofproducts
suchassmartphonesandtablets.LargefirmslikeAppleandSamsungspendenormous
amountsinR&Dtoimprovetheirproductsandthetechnologiestheyuse.
Inaddition,infrastructureisthebasicsupportsystemoftheeconomyandhencegovernments
investinimprovingthequalityastoincreaseefficiencyofthesystem.Investmentisakey
componentofaggregatedemandaswell,andhenceanincreaseinADwillboosteconomic
growthintheshortrun.InvestmentsinthelongrunwillshifttheLRAScurvetotherightand
attractforeigndirectinvestment,helpingtheeconomytoflourishevenmore.Governments
spendonimprovingtransportationsystems,fromroadstorailwaystations,telecommunications,
electricitygridsandsewagesystems,allasmeansoffosteringeconomicgrowth.
Evaluatetheeffectivenessofinterventionistsupplysidepoliciestoachieve
economicgrowth.
Supplysidepoliciesaregovernmentstrategiesaimedatboostingtheproductivecapacityofthe
economybyincreasingthequalityandquantityoffactorsofproduction.ByimprovingtheFOPs
longtermeconomicgrowthcanbeachieved,withashiftintheLRAScurveasshowninthe
diagram.Interventionistpoliciesaredeliberateattemptsbythegovernmenttodealwithmarket
imperfectionsintheeconomy.Theyfocusonfourareas:investmentinhumancapital,
investmentintechnology,investmentininfrastructureandindustrialpolicies.
Humancapitalreferstotheknowledge,skillsandexpertiseoftheworkforce.Animportantpart
oftheinterventionistpolicyhasbeentoincreasehumancapitalandspendoneducationand
trainingtoraisetheskills,mobilityandproductivityofthelabourforce.Educationhasapositive
externalityandseveralbenefits.Itincreasestheemployabilityoftheworkforce.Lessindividuals
remainunemployedandhenceitalsoincreasesthesizeoftheworkforce.Trainingisbeneficial
asthelabouracquiresmoreskillsandhenceproductivitygoesup,increasethequantityof
outputproduced.Furthermore,improvedcommunicationcanreducefrictionalunemploymentin
theeconomy.Whilebetterhealthoftheworkersdecreasesabsenteeismandimproves
productivity.TheincreaseinADinshortandrunandshiftintheLRASsuggeststhathuman
capitalimprovestheproductivecapacityoftheeconomyandisvitalforthegrowthand
development.
Longterminvestmentsindevelopingnewtechnologies,throughR&Dimproveworkprocesses
andenhanceefficiency,increasingtheproductivecapacity.Withmorefasterandefficient
technologyfirmsareabletoproducelargerquantitiesofoutput,whichresultsintheshiftofthe
LRAS.Infrastructureisthebasicsupportsystemoftheeconomyandhencegovernmentsinvest
inimprovingthequalityastoincreaseefficiencyofthesystem.
Industrialpoliciesarethosethattargetspecifickeyindustriestopromoteeconomicgrowth.For
exampletaxallowancescanbeusedtoprotectdomesticinfantindustriesfromlargerforeign
rivals.Taxcutsaretargetedatstrategicindustriestohelprevivethem.Acombinationoftax
breaksandsubsidiesoncommercialloanscancreateincentivesforfirmstolocateintheless
prosperousarea,whichhelpstoreduceunemploymentandfosterlongtermeconomicgrowth.
Therearehenceseveralbenefitsofgovernmentsusinginterventionistpoliciestofoster
economicgrowth.Supplysidepoliciesaremuchmoreeffectiveinpromotinggrowththan
demandsidepolicies.Thisisbecause,theyaimonachievinglongtermeconomicgrowth,which
comesfromanincreaseinproductivecapacityandashiftoftheLRAScurve.Demandside
policiesfosteronlyshortrungrowthastheymerelygobeyondproductivecapacityandreturnto
theLRAScurvelateron.Supplysidepoliciesalsohelpkeepinflationlevelslow.Anincreasein
theproductivepotentialoftheeconomyhelpstopreventtherisingofgeneralpricelevels
beyondcontrol.Unemploymentalsoremainslow,becausewhenthegovernmentspendsin
strengtheninghumancapital,theworkforcebecomesmuchmoreefficientandproductive.This
increasesnationaloutputinthelongrunasthelabourforceismoreemployable.Inaddition,
whennationaloutputincrease,itcanhelpacountryimproveitsbalanceofpayments.When
thereisinvestmentintechnology,humancapitalandinfrastructure,outputincreases,making
exportsmorecompetitive.
However,therearealsoseveraldrawbacksofsupplysidepolicies,especiallyinterventionist
policies.Thereareproblemsthatcanoccurwithgovernmentintervention.Theinterveningof
governmentsmayleadtoinefficienciesandmisallocationofresources.Alsoitreliesheavilyon
governmentspendingandthisisespeciallyaproblemwithincompetentandcorrupt
governments,hencethatwaymarketbasedpoliciesareperhapsmoreefficient.Thebiggest
drawbackofsupplysidepoliciesisthetimelag.Thetimesupplysidepoliciestaketoreapthe
benefitsisverylong.E.Gitcouldtakeanentiredecadeforanationtoenjoythebenefitsof
improvededucationandtraining,infrastructureetc.Also,itiscriticizedthatinversitionistsupply
sidepoliciesdonotnecessarilyimproveequityinthedistributionofincome,rathertheeconomic
growthcancreatemoredisparitiesinincomedistribution.
Inconclusion,Ibelievetheadvantagesofinterventionistsupplysidepoliciesoutweighits
drawbacks.Countrieswithnoncorruptgovernmentscanbenefithugelyfromthesepolicies,as
thisisthemosteffectivewaytoachievelongtermeconomicgrowth.Singaporeisoneexample
ofanationthathasbenefitedimmensely.Thegovernmentaimstoachieveeconomicgrowth
throughuseofinterventionistsupplysidepoliciesandhasbeeneffective.