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Introduction to Business: Homework Help Resource25 chapters | 508 lessons | 1 flashcard set
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Rana has a Masters Degree in Business Administration and is pursuing a Doctorial Degree. She has been teaching online for over a year. She has a strong business background.
One day in economics class, Sam's friend Vanessa asks him, 'What's the difference between an oligopoly and monopoly?' Sam tells Vanessa that it's clear that an oligopoly has some room for other firms to enter the market, and a few control it. But, it's also hard for new firms to enter because of things like laws and costs to begin their business, but they can still do it. And in a monopoly, only one firm controls the industry and entering the market is highly challenging if not impossible.
An oligopoly occurs when only a few firms control the market. These firms may have a high portion of control divided between each other. So, let's think about this. If there are few firms that dominate an industry, then these firms will make a continuous profit over the years. They can work together to stand strong.
Let's look at some of the common characteristics of an oligopoly.
In an oligopoly, there are only a few firms in the market. Each firm has a portion of the market share. Firms watch each other's strategies carefully and try to emulate what the more successful ones are doing. This will probably sound familiar to you because it happens all the time. Let's say Apple makes a really successful new laptop. Microsoft will then look at what Apple did differently from them and try to emulate it as close as possible, while still maintaining their core identity.
Other characteristics include being able to manage prices and strategies. The strategies are focused on the value the business can bring, the service it can provide, and the image it can give itself. For instance, two airlines begin a promotion to maintain their customer satisfaction, perhaps by allowing clients to carry two pieces of luggage instead of just one.
Lastly, in an oligopoly barriers to entry are high. This is because of things like costs to start the business, patenting or copy-writing products, and the government giving the company the right to do business. In a monopoly, the barriers to enter the market are much higher than in an oligopoly.
Example 1: The airline industry has only a few airlines that control the market. Airline A has 30% and B has 35%. They make up 65% of the market. Since the two firms take over 50% of the market, this is a good sign that this could be an oligopoly. The power to control prices for each can be anywhere from low to high. Since they're the top two on the market, they may raise prices because they know there isn't much competition. It's possible that firms may work together to come up with prices and share similar strategies, but that's normally illegal. They'd have to come up with a co-branding strategy or a joint venture.
Example 2: Four cell phone companies control over 92% of the market shares. Company 1 has 35%, 2 has 20%, 3 has 19%, and the last has 18%. Since the four companies control over 90% of the market, they're highly likely to be considered oligopolies.
Example 3: Four winery companies control over 90% of market shares. One has 30%, the other 30%, the other 15%, and last 15%. Maybe the top two follow each other's behaviors, and the other two do the same. It's highly likely there's an oligopoly present because four companies control the market with over 90% of market share.
Let's review. An oligopoly is when a few firms control the market. The barriers to entry are quite high but not as high as a monopoly. There's low to high control of pricing. Usually companies in oligopolies stay updated on each other's actions. A high control over market is a good sign that the firm may be an oligopoly.
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Introduction to Business: Homework Help Resource25 chapters | 508 lessons | 1 flashcard set