Oligopoly
- All the small firms aim to offer a unique product to a niche market. In the holiday market an example of a service a firm could offer to a niche market would be a safari holiday or a luxury cruise.
- There are very high barriers to entry such as high start up costs often caused by economies of scale particularly marketing and technical economies of scale.
- Brand loyalty is created through advertising.
- There are two types of Oligopoly:
- Perfect oligopolies where homogenous products are offered such as the sugar or oil markets.
- Imperfect oligopolies where branded, differentiated products are sold but close substitute goods are available.
- Most oligopolies are imperfect and so there is fierce competition to gain market share.
- Competition between firms is when a firm chooses to alter its marketing mix. The marketing mix of a firm is constituted of four parts:
- Price
- Place
- Promotion
- Product
- There is a high degree of interdependence between firms so the action of one firm may cause a reaction in another firm. However, what this reaction will be or if there will any reaction is unknown. This created uncertainty in the market, so economists have no single theory for evaluating the oligopoly market structure.
- In order to minimise or avoid this uncertainty in the market firms are likely to collude (act in a group as a single firm) or merge.
Market share
The proportion of the market share accounted for by the top 3, 4, or 5 firms is given as
Duopoly
- A duopoly is an oligopoly where the market is dominated by two large firms.
- There is the possibility of a price leader emerging where the rival firm follows the price of the other firm.
- There are high barriers to entry.
- Abnormal profits are likely.
Collusion
Collusion can take two forms, either formal (open) or informal (tacit). In formal collusion a cartel is formed like OPEC. In the UK, EU and US this breaks competition laws and cartels are illegal.
Informal collusions happen in secret and are not written agreements. They are based on price leadership theories (dominant firm or barometric firm).
These notes are from a lesson on 12/10/2004.
