*Economics* Oligopolistic Uncertainty

Topics: Oligopoly, Collusion, Economics Pages: 8 (1929 words) Published: October 24, 2012
“Oligopolistic interdependence creates uncertainty, which in turn may promote collusive action” Oligopoly is a specific type of market within business. The markets within an oligopoly are controlled by a small number of large and powerful companies; contrast to a monopoly (where the market is controlled by a single company, allowing it full control of the market and its respective conditions – e.g. price & availability) and perfect competition (where numerous businesses of parallel aptitude are providing homogeneous goods and services, at coinciding or differing prices and availability).

“Oligopolies dominate the modern economic landscape,
accounting for about half of all output produced in the economy.” One example of such a market that can be described as an oligopolistic market is petrol in the UK. This is because petrol is mainly distributed by a few major companies, such as Shell. Because of this it will be hard for other businesses to enter this market as the barriers of entry are set very high for example the fixed costs are high, this is reinforces the strength of barriers. Another example is due a lack of substitutes.

Other oligopolistic markets include the soft drink market with Pepsi, Coca-Cola and Robinsons dominating the market. The sports footwear market is being controlled by Nike and Adidas with two firm concentration of around 60% [2]. And, finally, the major high street banks; the three largest in the UK are Hong Kong and Shanghai Banking Corporation (HSBC), Lloyds Banking group and Barclays.

Oligopolies do not have a set of black and white rules they operate by. There are many varying and distinctive factors which contribute towards their decision making; such as legal, political, price, cost and the market conditions. Unless a particular event occurs such as a price war, oligopolies function much like a monopoly. Though, oligopoly may be competitive and pursue an independent strategy and compete through price, but this may lead to a price war.

Before I go on, it is important to understand what interdependence is. This is where one firm is likely to provoke a reaction by a competitive firm by trying to anticipate how others will react but cannot guarantee they will be correct, there this creates uncertainty.

To help better understand oligopolistic interdependence and the behaviour which coincides with this we can use kinked demand curve theory (first published in 1939 by Paul Sweezy [9]). The theory explains price rigidity in oligopolistic markets and we are able to use this to understand the procedures of oligopolistic markets. [10]


The loss of disproportionate number of customers is represented in the diagram by the vertical line here. The loss of disproportionate number of customers is represented in the diagram by the vertical line here.


From the previous diagram it shows why there may well be price rigidity e can see that oligopolies will want to stay at a fixed price (P). This is because; the businesses are interde1pendent and as a result will be concerned with their competitors actions. Therefore, these firms will understand that prices above “P” is very elastic (if they increase the price they will lose a disproportionate number of customers, shown as “R” on the diagram). Alternatively, if they lower their price, they will not gain a large number of customers as the other competitors and the demand curve below P is relativity inelastic due to other firms following also lowering their prices and they will engaging in a price war.

One further way to assess how oligopolies operate is by analysing their interaction with other businesses, acting and reacting to each other’s actions to try to become the dominant player, this can best be analysed and interpreted by game theory.

Game theory (or, theory of games was developed by John von Neumann and Oskar Morgenstern (1944)) [4] is used to calculate and predict the possible outcomes, (or, pay...
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