A2 – Oligopolies – revision presentation

Here is another presentation from the Khan Academy which covers the oligopoly market structure. An oligopoly is a market dominated by a few producers, each of which has control over the market. It is an industry where there is a high level of market concentration. However, oligopoly is best defined by the conduct (or behaviour) of firms within a market rather than its market structure.

The concentration ratio measures the extent to which a market or industry is dominated by a few leading firms. Normally an oligopoly exists when the top five firms in the market account for more than 60% of total market demand/sales.

Characteristics of an oligopoly
There is no single theory of how firms determine price and output under conditions of oligopoly. If a price war breaks out, oligopolists will produce and price much as a perfectly competitive industry would; at other times they act like a pure monopoly. But an oligopoly exhibits the following features:

1. Product branding: Each firm in the market is selling a branded (differentiated) product

2. Entry barriers: Significant entry barriers into the market prevent the dilution of competition in the long run which maintains supernormal profits for the dominant firms. It is perfectly possible for many smaller firms to operate on the periphery of an oligopolistic market, but none of them is large enough to have any significant effect on market prices and output

3. Interdependent decision-making: Interdependence means that firms must take into account likely reactions of their rivals to any change in price, output or forms of non-price competition. In perfect competition and monopoly, the producers did not have to consider a rival’s response when choosing output and price.

4. Non-price competition: Non-price competition s a consistent feature of the competitive strategies of oligopolistic firms. Examples of non-price competition includes:

a. Free deliveries and installation
b. Extended warranties for consumers and credit facilities
c. Longer opening hours (e.g. supermarkets and petrol stations)
d. Branding of products and heavy spending on advertising and marketing
e. Extensive after-sales service
f. Expanding into new markets + diversification of the product range

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