Question

answer 3 till iv

a) What are the two distinguishing characteristics of oligopoly? (3 points) (ii) Why are firms in oligopoly interdependent? (3 points) (iii) Why do firms in oligopoly face a temptation to collude? (3 points) (iv) Can you think of some examples of oligopolies that you buy from? Give three examples. (3 points)

Answer 1

(i) Distinguishing characteristics of oligopoly are:

1. The market is dominated by a small number of large firms. Each firm is too large considering their market size giving them a huge market share

2. The industry has a significant barrier to entry. These barriers are

a) exclusive ownership of resources

b) patents and copyrights

c) high startup cost

(ii) An oligopoly is a commodity market that occurs when there are a small number of large firms. Since the number of firms is small, they experience a high degree of mutual interdependence. Firms are interdependent because every firm takes into consideration the reaction of each firm while making a price or product decision. It makes the firm dependent on each other. The firm may have to reconsider the change in the light of likely reaction. The price and output policy of a firm affects the policies and profits of other firms. Like how shampoos of different brands cost almost the same because that is almost the same in terms of quality with some minor changes here and there.

(iii) Firms in an oligopoly may collude to set a price or output level for the industry to maximize their profits. At their best, colluding oligopoly firms may act as a monopoly. Firms motivated by self-interest may produce more while charging less and thereby reducing profits for themselves and for the whole industry. Although colluding is illegal, firms do collude to seta price for their product, it usually happens when they think of increasing the price or maybe opposing government policy.

(iv) Domestic Airline's oligopoly in the USA

4 airlines  American Airlines, Delta Air Lines, Southwest Airlines, and United Airlines control the domestic air of the country with flying 80% of domestic passengers.

Wireless carriers in the USA

This industry is an oligopoly in all countries. In the USA Sprint-Nextel, T-Mobile, Verizon, and AT&T have around 98% market share.

Oil and gas industry

This industry too is an oligopoly in almost all countries, where it is not oligopoly then its usual monopoly with the state having all the control like in Saudi Arabia where Aramco having all the share of countries oil and gas

In the USA ExxonMobil, Chevron, ConocoPhillips and Marathon Oil dominate the oil industry.