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Oligopoly definitions

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Intros
Lessons
  1. Oligopoly Definitions Overview
  2. Oligopoly Definitions
    • What defines Oligopoly?
    • Types of Barriers to Entry
    • Natural Oligopoly
    • Natural Duopoly
    • Strategies for firms
  3. Distinctive Features of Oligopoly
    • Interdependence
    • Each are large firms, actions affect market conditions
    • Cooperation
    • Forming a cartel
    • Acts like a monopoly
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Examples
Lessons
  1. Understanding Oligopoly Definitions
    Determine whether the following statements are true or false in an oligopoly, and why:
    1. Only 2 firms can compete.
    2. Only a small number of firms can compete.
    3. Natural and legal barriers of oligopoly are identical to monopoly
    4. At the efficient scale, one firm can produce enough for the entire market demand.
  2. Why might breakfast cereals made by firms be in an oligopoly market?
    1. Firm A is gaining more market shares than firm B and its profit is rising despite a sharp rise in the price of zinc. This is a key ingredient for both firms to create their product. In what type of market are these products sold. Explain.
      1. Knowing the Distinctive Features of Oligopoly
        Suppose firm A and firm B sell wallets and are competitors in an oligopoly. The marginal cost of producing wallets is 0. The following table is the quantity and price for both firms for wallets.

        Quantity

        Price

        1

        25

        2

        20

        3

        15

        4

        10

        5

        5

        6

        0


        If firm A and B form a cartel, what would be the price of wallets and quantities produced to maximize their joint?
        1. Why would two firms in an oligopoly might want to cooperate rather than be interdependent?
          Topic Notes
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          Oligopoly Definitions

          Oligopoly is a market that lies between perfect competition and monopoly.

          In an oligopoly:
          1. Natural or legal barriers prevent other new firms from entering the market.
          2. Only a small number of firms will compete.

          Recall from last section that economies of scale create natural barriers in monopoly.

          Oligopoly economies of scale create natural barriers in monopoly

          This causes firms to produce more at a low cost and increase profit, which we call natural monopoly.

          This also happens in oligopoly, so we call this natural oligopoly.

          We will look at two types of oligopoly:
          1. Natural duopoly

            2. Natural duopoly

            Suppose the market demand is 20 outputs. Firm produces at where economies of scale ends (efficient scale), which is at 10 outputs. Since there are 2 firms in duopoly, then there are 20 outputs in total, which meets demand.

          2. Natural oligopoly with 3 firms

            3. Natural oligopoly with 3 firms

            Suppose the market demand is 30 outputs. Firm produces at where economies of scale ends (efficient scale), which is at 10 outputs. Since there are 3 firms in duopoly, then there are 30 outputs in total, which meets demand.

          Note: Natural oligopoly is not limited to 2 or 3 firms.

          Distinctive Features of Oligopoly

          There are two distinctive features of oligopoly.
          1. Interdependence: Each firm is large enough so that one firms action can affect the market. Thus, the competing firms will be aware of each others action in the market and respond accordingly.

          2. Cooperation: Firms can increase their economic profit if they were to form a cartel and act like a monopoly.

          Note: a cartel is a group of firms working together by restricting output and increasing price to gain economic profit. This is what monopolies exactly do.