Oligopolies
Oligopoly– A market structure in which a
few large sellers (companies) control
most of the production of a good or
service. Exists when:
1.Only a few large sellers
2.Sellers offer identical/similar products.
3. Other sellers can’t enter market (high
barriers to entry)
Imperfectly Competitive Markets
Note: Ex. Cable TV companies—
Market dominated by one or two
sellers. Fewer sellers=fewer products
and less choices for consumers.
Note: Imperfectly competitive
structure usually means higher prices!
Oligopolies
1. Few Large Sellers—No other market
structure has this feature.
A market is considered an Oligopoly when
the largest 3-4 sellers produce 70% or
more of the product.
2. Identical or similar products—Sellers
have so much at stake they are less likely
to take risks.(Lose mkt. Share).
Oligopolies
3. High Barriers to Entry—A few
sellers can maintain control only if
other sellers cannot enter the
market.
Why difficult to enter:
High start up costs
Government regulations
Consumer Loyalty
Oligopolies at Work
Forms of NonPrice Competition—Sellers
try to control market by a lot of
advertising and through brand loyalty.
Ex. Breakfast cereals—Only 3 companies
control the market(80% of market).
Coca Cola/Pepsi—”Cola Wars”—Big advertising
Interdependent Pricing—Pricing depends a lot on
pricing of competitors.
Price Leadership—Market leader sets prices and
the rest follow.
Oligopolies at Work—
Price War—A failed pricing policy
may spark a price war where sellers
aggressively undercut each others
prices in an attempt to gain market
share.
Can severely hurt sellers and after
the war prices generally rise again.
Oligopolies at Work
Collusion—When sellers secretly agree to
set production levels or prices for their
products.—Illegal in U.S.!
Cartels—Companies openly organize a
system of price setting and market
sharing. Illegal in U.S.!
OPEC (Organization of the Petroleum Exporting
Countries). Set production levels as a means of
controlling oil prices.
Monopolies
Monopoly—A single seller (company)
dictates all production of a good or
service.—(Opposite of perfect
competition).
Monopoly exists when:
1. Single seller
2.No close substitute available
3. Complete barriers to entry
4. Complete control over pricing
Types of Monopolies
1. Natural—The sellers large size allows
for more efficient use of resources.
Ex. Utility companies
Ex. Cable TV companies
Immense start up costs
Economies of Scale: Can make a profit only when
producing large quantities
Types of Monopolies
Geographic Monopolies—Markets
potential limited by geographic
location.
Ex. A general store in a remote area
Technological Monopolies—A producer
develops a new technology that enables
the creation of a new product.
Ex. Gore-Tex material (Waterproofing).
Types of Monopolies
Government Monopolies—Any market in
which a government is the sole seller of a
product.
Building roads, bridges, canals, sewer services,
water plants, etc.
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or discovery for 20 years.
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