Oligopoly
OligopolyAn oligopoly describes a market situation in which there are limited or few sellers. Each seller knows that the other seller or sellers will react to its changes in prices and also quantities. This can cause a type of chain reaction in a market situation. In the world market there are oligopolies in steel production, automobiles, semi-conductor manufacturing, cigarettes, cereals, and also in telecommunications.
Often times oligopolistic industries supply a similar or identical product. These companies tend to maximize their profits by forming a cartel and acting like a monopoly. A cartel is an association of producers in a certain industry that agree to set common prices and output quotas to prevent competition. The larger the cartel, the more likely it will be that each member will increase output and cause the price of a good to be lower.
The majority of time an oligopoly is used describe a world market; however, the term oligopoly also describes conditions in smaller markets where a few gas stations, grocery stores or alternative restaurants or establishments dominate in their fields. A distinguishing characteristic of an oligopoly is the interdependence of firms. This means that any action on the part of one firm with respect to output, price, or quality will cause a reaction on the side of other firms.
Many times an oligopoly leads to price leadership between many firms. A price leadership is the practice in many oligopolistic industries in which the largest firm publishes its price list ahead of its competitors. Then these competitors feel the need to match those announced prices so they lower their prices. This is also termed a parallel pricing.
Oligopolies tend to be broken down into one of two distinguished groups. These groups are either a homogeneous or differentiated oligopoly. Homogeneous oligopolies have a standardized product and which include industrial, with petroleum serving as the standardized example, and also services such as banking. Differentiated oligopolies, where the products have some differences, are found in consumer goods industries, such as cars, biscuits, beer and electrical appliances.
There is however another oligopoly in which the manner of the corporation or industry is quite familiar to that of a monopoly. This oligopoly is termed collusive. A collusive oligopoly has the ability to behave in the manner of a monopoly and no longer faces a kink in the demand curve. With this type of oligopoly there comes many obstacles. A few examples of obstacles that need to be overcome are that of the Trade Practices Act, which states that any unfair or deceptive trade by a business is illegal, and also difficulty in getting price agreement because of different costs or a large number of firms in the oligopoly.
A current example of an oligopoly would be that of the Viacom/CBS merger. Viacom had proposed a $37 billion deal with CBS that would unite both of these media industries. The new Viacom would be one of only nine massive, diversified corporations-all of which took their present shape in the last fifteen years. These media giants include Time Warner, Disney, Rupert Murdoch’s News Corp., Viacom, Sony, Seagram, AT&T/Liberty Media, Bertelsmann, and GE. This oligopoly would never have passed legal convention if the regulators at the Federal Communications Commission and in the antitrust division of the Justice Department were doing their jobs, or if the Telecommunications Act of 1996 were not railroaded through Congress. These regulators have let these mergers slide, under intense pressure from the telecommunications and entertainment industry.
Microsoft, the biggest Software Company in the world, has been through a lot of debate of whether they have a monopoly and have the ability to establish an oligopoly industry. Microsoft Corporation has the ability to control software prices in the market. They have in a way an oligopoly in this industry. If Microsoft decides to lower their prices on goods then the other sellers in their industry will also decide to lower their price on goods. Microsoft knows that they have control over the other companies and uses that to their advantage.
Over the past few months there has been talk about dismantling Microsoft Corporation. The U.S. Justice Department has mentioned a breakup of Microsoft, which would help destroy their monopoly in the computer industry. However, some people still have concern about the disruption of Microsoft and its effect on the computer industry, which has largely thrived and operated on Microsoft’s standard.
Today the phone industry, once the biggest monopoly in U.S. history, is evolving into an oligopoly consisting of three or four huge carriers. Their intent is to offer an impressive array of long-distance, local, Internet, and wireless services to consumers and businesses. An example would be that of MCI WorldCom Inc. which has recently reached an agreement to acquire Sprint Corp for an estimated $115 billion in stock. This deal between MCI WorldCom and Sprint represents the largest takeover in history, and would create the world’s biggest telecommunications company. This deal brings together the second and third largest long distance carriers in the U.S. with an estimated annual revenue of about $50 billion. The companies would have 30% of the consumer long-distance market, with more than 30 million long-distance customers and a global reach from the U.S. to Europe and Asia. The new company, which is going to be called WorldCom, would have a stock market value of over $200 billion.
BellSouth Corp. also wanted to acquire Sprint Corp. but was in the end outgunned by that of MCI WorldCom. This proves to consumers and the rest of the telecommunications industry that BellSouth Corp. is willing to make huge investments to survive in the market against oligopolies. The goal of the telecommunications oligopoly is to provide a one stop shopping for telecommunications services including phone, Internet, and wireless. Since the 1996 Telecommunications Act unleashed a frenzy of mergers, BellSouth has gone from being the largest of seven regional Bells to the second smallest of four. The smallest one, US West, is about to be acquired by Qwest Communications. Only BellSouth boasts the same corporate structure as three years ago.
The graph of an oligopoly consists of a kinked demand curve. This kinked demand curve is constructive in the assumption that oligopolists match price decreases but not price increases. A company starts off with a given price, Po, and we assume that the quantity demanded at the price for this individual oligopolist is Qo. The starting price of Po is usually consistent and represents a stable market price. If the oligopolist assumes that its rival will not react to its price change than it faces demand curve D1 and D2 with a marginal revenue curve of MR1. However, if the oligopolist assumes that the rival will react then the oligopoly faces the demand curve at D1D2 with a marginal revenue curve at MR2. In a lower price situation, oligopolies tend to assume that if it lowers prices than other companies will follow suit in order not to lose their shares of the market. The initial oligopoly that lowered its prices does not drastically increase its quantity demanded so it faces a demand curve at D1D2. If the oligopoly raises its price over the original price, Po, than the rivals will most likely not follow the chain. A higher price than Po will cause quantity demanded to decrease rapidly. If the demand curve is to the left and above E then it will generally will be elastic, or efficient. Prices above Po are consistent with the relevant demand curve of D1D1, and prices below Po are consistent with the relevant demand curve of D2D2. The kink in the demand curve occurs at the point labeled E. There is also a gap in the marginal revenue curve marked by MR1 and MR2.
There are many oligopolies in the world market that dominate their respective fields. They have the ability to control prices and quantities of their goods, forcing other companies in that specific industry to adjust to the oligopoly’s changes. The oligopoly has the power to do that because there are few sellers in the industry and each seller reacts to that of the other ones. This often leads to price leadership. This price leadership has a dramatic impact on consumers. Companies compete with the prices of goods and they keep lowering their prices. At the time these price decreases are beneficial for consumers; however, an oligopoly can afford to lower their prices and the smaller firms can not. As a result these smaller firms might be annihilated and enable the oligopoly to dominate the industry. If the oligopoly comes to dominate their industry they then have the ability to set prices higher, a terrible aspect for consumers.