Alright, so let's move on to our next market structure, the oligopoly. And as you'll see as we go through this unit, this is the odd one out. This guy kind of goes on his own accord here and he's going to follow some different rules, alright? So let's dive right in. The first thing here, a market is an oligopoly when the nature of the good for sale well, this doesn't really give us much information. The goods could either be identical or differentiated. Okay? So there's not really much we can get out of the nature of the good here. Alright? So it's either identical or differentiated here, right? So identical, that's when they're all the same, right? You can't tell one farmer's wheat from another farmer's wheat. When we talk about oligopolies, one of the identical goods is aluminum. So there's only a few producers of aluminum and that would be an oligopoly good that would be identical. A differentiated good would be something like Coke and Pepsi, right? It's like soda, there's only 2 big suppliers of it, so that would be a differentiated product in this market. So what we're going to see is that sellers in this market are going to be price makers to an extent here. Okay? So when we talk about monopolistic competition, we see something similar where they do have some influence over the price, but not total influence over the price because they still have to deal with competition. Okay. So they're price makers to an extent and we see like we talked about before right, there are few producers in an oligopoly market. Right? So when we think of a classic oligopoly would be something like Coca Cola and Pepsi, right? They're the 2 main producers of soft drinks and they're going to have to deal with each other when they're making pricing decisions, right? We're going to say that these firms are interdependent, okay? And when I say interdependent, that means that they have to depend on each other when they're making pricing decisions, right? If Coca Cola goes ahead and raises their price by a dollar that's going to have a significant effect on their demand, right? Because a lot of people might go and drink Pepsi instead, right? So if they drop their price by a dollar, Pepsi might have to also match that price cut, right? So they have to work strategically, make their decisions strategically based on their competitors' decisions. So that's this interdependence between the firms. Right? And we're going to talk about market power here. Right? Market power, that's the ability to have influence on the price. Okay. We're going to say that oligopolies do have quite a bit of market power, right? Because there's only a few firms in this industry, so they're going to have some influence over the price. Obviously, it's not going to be as strong as a monopoly's market power because a monopoly is there's only 1 producer, right? So you could imagine that one producer is going to have a lot of influence even compared to perfect competition, right, where there's tons and tons of producers, tons and tons of buyers and there's no market power for anybody. Right? So here we do see that there is some market power, for the oligopoly firms. Next, let's talk about this entry and exit. So we talked about perfect competition, we said that firms could freely enter and exit the market, right? If you wanted to produce wheat, you go and you buy a farm, you start producing wheat. Easy enough, but here what we're going to deal with is these barriers to entry, right? Barriers to entry are things that are going to block you, so the entry to the market is blocked by these barriers to entry, right? And we're going to go into a little more detail of what these barriers to entry are and you'll see when we study monopolies or if you studied them already that they're quite similar, right? You're going to see almost exactly the same at barriers to entry in both chapters. Okay? So last these example products, right? We've already mentioned a couple. We said Coke and Pepsi. This is kind of the classic example of the oligopoly that you see everywhere. Coke and Pepsi or maybe something like these big retailers like Walmart and Target, they don't have such a strong hold, right? There are other places to get goods, but they do own quite a huge chunk of the market there in retail goods. So Walmart and Target could be a good one, right, but the Coke and Pepsi that that tells us about these differentiated goods right? Because we talked about that they could be differentiated or identical, right? So that would be an example of a differentiated oligopoly and then aluminum was a good example of an identical product oligopoly, right? So yeah, with aluminum, there's just a few suppliers of this good and it just tends to have an oligopoly setting as well. Alright, so let's go ahead and pause here. In the next video, let's discuss those barriers to entry into the oligopoly market.
Characteristics of Oligopoly: Study with Video Lessons, Practice Problems & Examples
Created using AIOligopolies are market structures characterized by a few firms that can be price makers due to their market power. Goods can be identical, like aluminum, or differentiated, such as Coca-Cola and Pepsi. Barriers to entry, including ownership of key resources, government regulation through patents, and economies of scale, prevent new firms from entering the market. These barriers create interdependence among existing firms, influencing their pricing strategies and leading to potential collusion. Understanding these dynamics is crucial for analyzing market behavior and competition.
Characteristics of Oligopoly
Video transcript
Oligopoly Barriers to Entry
Video transcript
Alright, so now let's discuss some of those barriers to entry, right? These barriers to entry ensure that other firms cannot enter the market. They're not going to be able to enter because of these barriers. First, we have the ownership of key resources. A notable example is the company De Beers, which supplies diamonds to the industry. For a very long time, they owned substantially all the diamond mines in the world. So you can imagine if you wanted to get into the diamond business, you'd probably have a pretty hard time. You would need some source of diamonds, and De Beers controls all of those sources. If you can't get diamonds, you can't get into the business. You wouldn't be able to supply them, so that was a barrier to entry into that industry. You had no access to this key resource; these other companies already own them, and you have no access. So that could be a barrier to entry.
The next one is government regulation. The government could make a legal barrier to entry. Let’s say you invent some product. If you invent a product, you would go to the government and file for a patent. This patent would give you the exclusive right to produce it. You would be the only one who’s allowed to produce it because you’re protected by the law. You invented it and you have a patent. So if I go ahead and try to produce it, I wouldn't be allowed to. You could sue me, come after me, and get my money. You are legally protected to keep control of that product. So that's a barrier to entry. I'm not able to get into that business and start selling that product because you are the only one that's allowed to produce it.
The last one here is economies of scale. This would be a situation where it makes sense for an oligopoly to form. Economies of scale is a situation where you can increase the quantity you're producing, and by increasing the quantity, your average total costs are going to decrease. Your average total cost per unit is less by producing more units. You're taking advantage of specialization in your workers or getting quantity discounts by buying in bulk, things like that, economies of scale. On the graph here in green, we've got the long-run average total cost of perfect competition and notice how quickly it reaches its minimum efficient scale. Minimum efficient scale is that minimum point where those economies of scale are exhausted. We see on this whole portion, the cost is decreasing as they increase quantity. We're moving to the right and costs are going down. That's economies of scale, but we reach the end of those economies of scale pretty quickly. Look at the demand, how far out it is. Let's pretend that's way over there and this is just a very small portion. Right here, they can only satisfy a very low quantity. They're only going to produce a low quantity, so that's why in perfect competition, it makes sense for there to be many suppliers because they each make such a small little quantity to fulfill this much grander demand. So that would make sense for a long-run average total cost curve in perfect competition, but in an oligopoly look at this yellow curve, look how much more economies of scale they get. Notice how this curve keeps going for a long time to a very low average total cost. They're getting tons of economies of scale, but they still can't supply that demand. The demand is still further to the right. At this minimum average total cost here, they still can't supply the whole amount for demand. So this would say some high quantity compared to the low quantity of perfect competition. So you could imagine if there were say 2 firms in this market, each one supplying this quantity right here. The first one supplying this much quantity and the second one could supply the same amount. If they're the same size, something like that, the 2 of them could get us out to our demand curve. So with 2 companies here, we can naturally fill up the demand. So this could be the situation, you might call this a natural duopoly. Duopoly is a type of oligopoly where we have 2. There's a duo and this is a situation where it's a natural duopoly because the economies of scale make it make sense for this market for just 2 producers to produce it. If we had a bunch of smaller companies produce it, well they wouldn't reach their minimum efficient scale. They would be producing at some higher cost and that would be inefficient. So it just makes more sense for there to be fewer companies when we have a situation like this where there's lots of economies of scale. Okay, so when we dive into the rest of this chapter, we're going to be focusing a lot on these duopolies. We're going to for the most part, while we deal with oligopolies, just talk about a situation where there's 2 firms, okay? Because it's the simplest case, and we can get a lot of information out of that.
One difference between oligopoly and monopolistic competition is that:
An example of oligopoly is:
A key feature of an oligopolistic market is that
A major threat to long term profits exists when barriers to entry into an industry are high
Here’s what students ask on this topic:
What are the main characteristics of an oligopoly?
An oligopoly is a market structure characterized by a few firms that dominate the market. These firms can be price makers due to their significant market power. The goods in an oligopoly can be either identical, like aluminum, or differentiated, such as Coca-Cola and Pepsi. Firms in an oligopoly are interdependent, meaning their pricing and output decisions are influenced by the actions of other firms in the market. Barriers to entry, such as ownership of key resources, government regulations (e.g., patents), and economies of scale, prevent new firms from entering the market easily. This interdependence often leads to strategic behavior and potential collusion among firms.
Created using AIHow do barriers to entry affect oligopolistic markets?
Barriers to entry play a crucial role in maintaining the structure of oligopolistic markets by preventing new firms from entering. These barriers include ownership of key resources, such as De Beers' control over diamond mines, government regulations like patents that grant exclusive production rights, and economies of scale that allow existing firms to produce at lower average costs due to higher production volumes. These barriers ensure that only a few firms dominate the market, leading to interdependence in pricing and output decisions. As a result, existing firms can maintain their market power and influence over prices, reducing the threat of new competition.
Created using AIWhat is the difference between identical and differentiated goods in an oligopoly?
In an oligopoly, goods can be either identical or differentiated. Identical goods are homogeneous products that are indistinguishable from one another, such as aluminum. In this case, consumers do not perceive any difference between the products offered by different firms. Differentiated goods, on the other hand, are products that are distinct in terms of branding, quality, or features, such as Coca-Cola and Pepsi. Consumers perceive these products as different, even though they serve the same basic need. The nature of the goods affects the competitive strategies of firms, with differentiated goods often leading to more emphasis on marketing and brand loyalty.
Created using AIWhy are firms in an oligopoly considered interdependent?
Firms in an oligopoly are considered interdependent because their pricing and output decisions are influenced by the actions of other firms in the market. This interdependence arises because there are only a few firms, and each firm's actions can significantly impact the market share and profitability of the others. For example, if Coca-Cola decides to lower its prices, Pepsi may need to follow suit to remain competitive. This strategic behavior requires firms to consider the potential reactions of their rivals when making decisions, leading to a complex interplay of competitive and cooperative strategies.
Created using AIWhat role do economies of scale play in the formation of oligopolies?
Economies of scale play a significant role in the formation of oligopolies by allowing firms to reduce their average total costs as they increase production. In markets where economies of scale are substantial, it becomes more efficient for a few large firms to dominate the market rather than many small firms. This is because larger firms can take advantage of cost savings from bulk purchasing, specialized labor, and more efficient production processes. As a result, these firms can produce at a lower cost per unit, making it difficult for new entrants to compete. This leads to a market structure where only a few firms can operate efficiently, creating an oligopoly.
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