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Learn more about Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below. Recommended textbooks for you  ENGR.ECONOMIC ANALYSIS ISBN:9780190931919 Author:NEWNAN Publisher:Oxford University Press Principles of Economics (12th Edition) ISBN:9780134078779 Author:Karl E. Case, Ray C. Fair, Sharon E. Oster Publisher:PEARSON Engineering Economy (17th Edition) ISBN:9780134870069 Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling Publisher:PEARSON Principles of Economics (MindTap Course List) ISBN:9781305585126 Author:N. Gregory Mankiw Publisher:Cengage Learning Managerial Economics: A Problem Solving Approach ISBN:9781337106665 Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor Publisher:Cengage Learning Managerial Economics & Business Strategy (Mcgraw-... ISBN:9781259290619 Author:Michael Baye, Jeff Prince Publisher:McGraw-Hill Education ENGR.ECONOMIC ANALYSIS ISBN:9780190931919 Author:NEWNAN Publisher:Oxford University Press Principles of Economics (12th Edition) ISBN:9780134078779 Author:Karl E. Case, Ray C. Fair, Sharon E. Oster Publisher:PEARSON Engineering Economy (17th Edition) ISBN:9780134870069 Author:William G. Sullivan, Elin M. Wicks, C. Patrick Koelling Publisher:PEARSON Principles of Economics (MindTap Course List) ISBN:9781305585126 Author:N. Gregory Mankiw Publisher:Cengage Learning Managerial Economics: A Problem Solving Approach ISBN:9781337106665 Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor Publisher:Cengage Learning Managerial Economics & Business Strategy (Mcgraw-... ISBN:9781259290619 Author:Michael Baye, Jeff Prince Publisher:McGraw-Hill Education What Is an Oligopoly?An oligopoly is a market structure with a small number of firms, none of which can keep the others from having significant influence. The concentration ratio measures the market share of the largest firms. A monopoly is a market with only one producer, a duopoly has two firms, and an oligopoly consists of two or more firms. There is no precise upper limit to the number of firms in an oligopoly, but the number must be low enough that the actions of one firm significantly influence the others. Key Takeaways
OligopolyUnderstanding OligopoliesOligopolies in history include steel manufacturers, oil companies, railroads, tire manufacturing, grocery store chains, and wireless carriers. The economic and legal concern is that an oligopoly can block new entrants, slow innovation, and increase prices, all of which harm consumers. Firms in an oligopoly set prices, whether collectively—in a cartel—or under the leadership of one firm, rather than taking prices from the market. Profit margins are thus higher than they would be in a more competitive market. Conditions That Enable OligopoliesThe conditions that enable oligopolies to exist include high entry costs in capital expenditures, legal privilege (license to use wireless spectrum or land for railroads), and a platform that gains value with more customers (such as social media). The global tech and trade transformation has changed some of these conditions: offshore production and the rise of "mini-mills" have affected the steel industry, for example. In the office software application space, Microsoft was targeted by Google Docs, which Google funded using cash from its web search business. Why Are Oligopolies Stable?An interesting question is why such a group is stable. The firms need to see the benefits of collaboration over the costs of economic competition, then agree to not compete and instead agree on the benefits of co-operation. The firms have sometimes found creative ways to avoid the appearance of price-fixing, such as using phases of the moon. Price-fixing is the act of setting prices, rather than letting them be determined by the free-market forces. Another approach is for firms to follow a recognized price leader; when the leader raises prices, the others will follow. The Prisoner's DilemmaThe main problem that these firms face is that each firm has an incentive to cheat; if all firms in the oligopoly agree to jointly restrict supply and keep prices high, then each firm stands to capture substantial business from the others by breaking the agreement undercutting the others. Such competition can be waged through prices, or through simply the individual company expanding its own output brought to market. Game theorists have developed models for these scenarios, which form a sort of prisoner's dilemma. When costs and benefits are balanced so that no firm wants to break from the group, it is considered the Nash equilibrium state for oligopolies. This can be achieved by contractual or market conditions, legal restrictions, or strategic relationships between members of the oligopoly that enable the punishment of cheaters. Companies in an oligopoly benefit from price-fixing, setting prices collectively, or under the direction of one firm in the bunch, rather than relying on free-market forces to do so. Special ConsiderationsIt is interesting to note that both the problem of maintaining an oligopoly and the problem of coordinating action among buyers and sellers in general on the market involve shaping the payoffs to various prisoner's dilemmas and related coordination games that repeat over time. As a result, many of the same institutional factors that facilitate the development of market economies by reducing prisoner's dilemma problems among market participants, such as secure enforcement of contracts, cultural conditions of high trust and reciprocity, and laissez-faire economic policy, might also potentially help encourage and sustain oligopolies. Governments sometimes respond to oligopolies with laws against price-fixing and collusion. Yet, a cartel can price fix if they operate beyond the reach or with the blessing of governments. OPEC is one example of this since it is a cartel of oil-producing states with no overarching authority. Alternatively, in mixed economies, oligopolies often seek out and lobby for favorable government policy to operate under the regulation or even direct supervision of government agencies. What Are Some Negative Effects of an Oligopoly?An oligopoly is when a few companies exert significant control over a given market. Together, these companies may control prices by colluding with each other, ultimately providing uncompetitive prices in the market. Among other detrimental effects of an oligopoly include limiting new entrants in the market and decreased innovation. Oligopolies have been found in the oil industry, railroad companies, wireless carriers, and big tech. What Is an Example of a Current Oligopoly?One measure that shows if an oligopoly is present is the concentration ratio, which calculates the size of companies in comparison to their industry. Instances where a high concentration ratio is present include mass media. In the U.S., for example, the sector is dominated by just five companies: NBC Universal; Walt Disney; Time Warner; Viacom CBS; and News Corporation—even as streaming services like Netflix and Amazon Prime begin to encroach on this market. Meanwhile, within big tech, two companies control smartphone operating systems: Google Android and Apple iOS. Is the U.S. Airline Industry an Oligopoly?With just four companies controlling nearly two-thirds of all domestic flights in the U.S. as of 2021, it has been purported that the airline industry is an oligopoly. These four companies are Delta Airlines, United Airlines Holdings, Southwest Airlines, and American Airlines. According to a report compiled by the White House, "reduced competition contributes to increasing fees like baggage and cancellation fees. These fees are often raised in lockstep, demonstrating a lack of meaningful competitive pressure, and are often hidden from consumers at the point of purchase." Interestingly, in 1978, The Airline Deregulation Act was imposed, which stripped away the Civil Aeronautics Board the ability to regulate the industry. Prior to this time, the airline industry operated much like a public utility, while fare prices had declined 20 years before the deregulation was introduced. What is an agreement among firms in a market about quantities to produce?Collusion•An agreement among firms in a market about quantities to produce or prices to charge. Cartel•A group of firms acting in unison. Although oligopolists would like to form cartels and earn monopoly profits, often that is not possible.
Is an agreement among firms in the industry to divide the market and fix the price?Cartel: A formal agreement among firms in an industry to set the price of a product and the outputs of the individual firms or to divide the market for the product geographically. To maximize profits, the firms collude and agree to a certain price.
What is formal agreement in oligopoly pricing?A cartel is a formal agreement among firms in an oligopolistic industry. Cartel members may agree on such matters as prices, total industry output, market shares, allocation of customers, allocation of territories, bid-rigging, establishment of common sales agencies, and the division of profits or combination of these.
What is oligopoly and monopoly?A monopoly is when a single company produces goods with no close substitute, while an oligopoly is when a small number of relatively large companies produce similar, but slightly different goods. In both cases, significant barriers to entry prevent other enterprises from competing.
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When firms have agreements among themselves on the quantity to produce and the price at which to sell we refer to their form of organization as a?
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