Question

Hello I need help with this. It is microeconomics and it must be 5 sentences or longer please:

Name a product that you regularly purchase from a firm that operates in an oligopolistic industry. Explain why the product and firm fit the model of oligopoly. Think about the TV commercials and/or print advertisements that you’ve seen from this industry: What interdependence have you noticed between the firm you selected and its rivals in terms of product differentiation, price leadership, or price competition? Explain your answer.

Answer 1

oligopoly is a market form wherein a market or industry is dominated by a small number of large sellers. Oligopolies can result from various forms of collusion which reduce competition and lead to higher prices for consumers. Oligopolies have their own market structure

Examples--

Common Industries Overshadowed By Oligopolies

• Cable Television Services
• Entertainment (Music and Film)
• Airlines
• Mass Media
• Pharmaceuticals
• Computers & Software
• Cellular Phone Services
• Smart Phone and Computer Operating Systems
• Aluminum and Steel
• Oil and Gas
• Automobiles

• Oligopolies

• National mass media and news outlets are a prime example of an oligopoly, with 90% of U.S. media outlets owned by six corporations: Walt Disney (DIS), Time Warner (TWX), CBS Corporation (CBS), Viacom (VIAB), NBC Universal, and News Corporation (NWSA).
• Operating systems for smartphones and computers provide excellent examples of oligopolies. Apple iOS and Google Android dominate smartphone operating systems, while computer operating systems are overshadowed by Apple and Windows.
• Automobile manufacturing another example of an oligopoly, with the leading auto manufacturers in the United States being Ford (F), GMC, and Chrysler.
• While there are smaller cell phone service providers, the providers that tend to dominate the industry are Verizon (VZ), Sprint (S), AT&T (T), and T-Mobile (TMUS).
• The music entertainment industry is dominated by Universal Music Group, Sony, BMG, Warner and EMI GroGroup

Key characteristics

The main characteristics of firms operating in a market with few close rivals include:

Interdependence

Firms that are interdependent cannot act independently of each other. A firm operating in a market with just a few competitors must take the potential reaction of its closest rivals into account when making its own decisions. For example, if a petrol retailer like Texaco wishes to increase its market share by reducing price, it must take into account the possibility that close rivals, such as Shell and BP, may reduce their price in retaliation. An understanding of game theory and thePrisoner’s Dilemma helps appreciate the concept of interdependence.

Strategy

Strategy is extremely important to firms that are interdependent. Because firms cannot act independently, they must anticipate the likely response of a rival to any given change in their price, or their non-price activity. In other words, they need to plan, and work out a range of possible options based on how they think rivals might react.

Oligopolists have to make critical strategic decisions, such as:

• Whether to compete with rivals, or collude with them.

• Whether to raise or lower price, or keep price constant.

• Whether to be the first firm to implement a new strategy, or whether to wait and see what rivals do. The advantages of ‘going first’ or ‘going second’ are respectively called 1st and 2nd-mover advantage. Sometimes it pays to go first because a firm can generate head-start profits. 2nd mover advantage occurs when it pays to wait and see what new strategies are launched by rivals, and then try to improve on them or find ways to undermine them.

Barriers to entry

Oligopolies and monopolies frequently maintain their position of dominance in a market might because it is too costly or difficult for potential rivals to enter the market. These hurdles are called barriers to entry and the incumbent can erect them deliberately, or they can exploit natural barriers that exist.

Natural entry barriers include:

Economies of large scale production.

If a market has significant economies of scalethat have already been exploited by the incumbents, new entrants are deterred.

Ownership or control of a key scarce resource

Owning scarce resources that other firms would like to use creates a considerable barrier to entry, such as an airline controlling access to an airport.

High set-up costs

High set-up costs deter initial market entry, because they increase break-even output, and delay the possibility of making profits. Many of these costs are sunk costs, which are costs that cannot be recovered when a firm leaves a market, and include marketing and advertising costs and other fixed costs.

High R&D costs

Spending money on Research and Development (R & D) is often a signal to potential entrants that the firm has large financial reserves. In order to compete, new entrants will have to match, or exceed, this level of spending in order to compete in the future. This deters entry, and is widely found in oligopolistic markets such as pharmaceuticals and the chemical industry.

Artificial barriers include:

Predatory pricing

Predatory pricing occurs when a firm deliberately tries to push prices low enough to force rivals out of the market.

Limit pricing

Limit pricing means the incumbent firm sets a low price, and a high output, so that entrants cannot make a profit at that price. This is best achieved by selling at a price just below theaverage total costs (ATC) of potential entrants. This signals to potential entrants that profits are impossible to make.

Superior knowledge

An incumbent may, over time, have built up a superior level of knowledge of the market, its customers, and its production costs. This superior knowledge can deter entrants into the market.

Predatory acquisition

Predatory acquisition involves taking-over a potential rival by purchasing sufficient shares to gain a controlling interest, or by a complete buy-out. As with other deliberate barriers, regulators, like the Competition and Markets Authority (CMA), may prevent this because it is likely to reduce competition.

Advertising

Advertising is another sunk cost - the more that is spent by incumbent firms the greater the deterrent to new entrants.

A strong brand

A strong brand creates loyalty, ‘locks in’ existing customers, and deters entry.

Loyalty schemes

Schemes such as Tesco’s Club Card, help oligopolists retain customer loyalty and deter entrants who need to gain market share.

Exclusive contracts, patents and licences

These make entry difficult as they favour existing firms who have won the contracts or own the licenses. For example, contracts between suppliers and retailers can exclude other retailers from entering the market.

Vertical integration

Vertical integration can ‘tie up’ the supply chain and make life tough for potential entrants, such as an electronics manufacturer like Sony having its own retail outlets (Sony Centres), and a brewer like Heineken owning its own chain of UK pubs, which it acquired from the brewers Scottish and Newcastle in 2008.

Collusive oligopolies

Another key feature of oligopolistic markets is that firms may attempt to collude, rather than compete. If colluding, participants act like amonopoly and can enjoy the benefits of higher profits over the long term.