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This reaction paper summarizes the key aspects of oligopoly market structure. It defines oligopoly as a market dominated by a small number of large sellers. The paper outlines the key characteristics of oligopoly markets, including interdependence between firms, information and strategic planning, and natural and artificial barriers to entry that protect incumbent firms. Both the advantages, such as price stability, and disadvantages, like reduced competition and consumer choice, of oligopoly market structure are identified.
This reaction paper summarizes the key aspects of oligopoly market structure. It defines oligopoly as a market dominated by a small number of large sellers. The paper outlines the key characteristics of oligopoly markets, including interdependence between firms, information and strategic planning, and natural and artificial barriers to entry that protect incumbent firms. Both the advantages, such as price stability, and disadvantages, like reduced competition and consumer choice, of oligopoly market structure are identified.
This reaction paper summarizes the key aspects of oligopoly market structure. It defines oligopoly as a market dominated by a small number of large sellers. The paper outlines the key characteristics of oligopoly markets, including interdependence between firms, information and strategic planning, and natural and artificial barriers to entry that protect incumbent firms. Both the advantages, such as price stability, and disadvantages, like reduced competition and consumer choice, of oligopoly market structure are identified.
Professor: Dr. Glenn Sadiangcolor This week’s topic is all about market structure that will focuses on oligopoly. Since two reporters were assigned for this topic, my report only covers defining oligopoly, stating its key characteristics, the natural and artificial barriers to entry, and identifying the advantages and disadvantages of this market structure. I started my discussion by making a graph presenting the X and Y axis, where X axis will represent the number of competitors present in the market and the Y axis represent the product differentiation. On this graph, I was able to illustrates the four type of market structure (Monopoly, Perfect Competition, Monopolistic Competition, and Oligopoly) in terms of product differentiation and number of competitors. With the help of that graph, it become easy for me to describe each market structure. Discussion about what is oligopoly comes next. As I mentioned in the discussion of the graph, it is a market form wherein a market or industry is dominated by a small number of large sellers. I cited different examples of oligopolies such as airlines companies, telecommunications companies, resorts and many more. Our professor says that automobile companies are also example of oligopoly. The next topic that I discussed is about the key characteristics of oligopoly. These are interdependence, information and strategy, and barriers to entry. It was all true since it happens in real life. Firms operating in an oligopoly market with a few competitors must take the potential reaction of its closest rivals into account when making its own decisions. Also, because firms cannot act independently, they must anticipate the likely response of a rival to any given change in their price, or their non-price activity. When it comes to barriers to entry, oligopolies frequently maintain their position of dominance in a market might because it is too costly or difficult for potential rivals to enter the market. Due to these barriers to entry, I also discussed the different natural and artificial barriers which includes the following: economies of large scale production which means if a market has significant economies of scale that have already been exploited by the incumbents, new entrants are deterred. Ownership or control of a key scarce resource that other firms would like to use creates a considerable barrier to entry, such as an airline controlling access to an airport. High set-up costs deter initial market entry, because they increase break-even output, and delay the possibility of making profits. And high R&D costs such as spending money on Research and Development (R & D) is often a signal to potential entrants that the firm has large financial reserves. In order to compete, new entrants will have to match, or exceed, this level of spending in order to compete in the future. Moreover, artificial barriers include predatory pricing when a firm deliberately tries to push prices low enough to force rivals out of the market, limit pricing which means the incumbent firm sets a low price, and a high output, so that entrants cannot make a profit at that price, superior knowledge can deter entrants into the market, predatory acquisition involves taking-over a potential rival by purchasing sufficient shares to gain a controlling interest, or by a complete buy-out, advertising is another sunk cost - the more that is spent by incumbent firms the greater the deterrent to new entrants, a strong brand creates loyalty, ‘locks in’ existing customers, and deters entry, loyalty schemes, exclusive contracts, patents and licenses which make entry difficult as they favor existing firms who have won the contracts or own the licenses, and vertical integration can ‘tie up’ the supply chain and make life tough for potential entrants. Knowing those barriers, it was very clear for me why most oligopoly companies is more stable than those ordinary companies. Competition is steep but once you’re in, you have a high chance of being profitable. A firm with small capital will not be able to compete with those large firms. Even an entry in the market will not be possible. Another topic assigned to me is the discussion of the advantages of an oligopoly. Oligopolies may adopt a highly competitive strategy, in which case they can generate similar benefits to more competitive market structures, such as lower prices. Oligopolies may be dynamically efficient in terms of innovation and new product and process development. The super- normal profits they generate may be used to innovate, in which case the consumer may gain. Price stability may bring advantages to consumers and the macro-economy because it helps consumers plan ahead and stabilizes their expenditure, which may help stabilize the trade cycle. And of course, if there were advantages, there are also disadvantages in oligopoly, there are the following, High concentration reduces consumer choice, Cartel-like behavior reduces competition and can lead to higher prices and reduced output. Given the lack of competition, oligopolies may be free to engage in the manipulation of consumer decision making. Firms can be prevented from entering a market because of deliberate barriers to entry. There is a potential loss of economic welfare. Oligopolies may be allocatively and productively inefficient.