Explain why oligopolistic firms are affected
Uncertainty in oligopoly
Rivals have no need to follow suit because it is to their competitive advantage to keep their prices as they are. For example, the banking sector in Singapore witnessed a major consolidation in , where a number of oligopolies merged among themselves leading to firms with even higher market share. However, if the cartel collapses because of defections, the firms would revert to competing, profits would drop, and all would be worse off. There is no single theory of price and output under conditions of oligopoly. Price leadership, which occurs when a dominant competitor sets the industry price and others follow suit, is an informal type of collusion which is generally legal. The incentive for SingTel to pass on cost-savings to consumers is also high given the stiff competition that exists between the three telecommunication firms. Under part b , students should be able to see that the oligopoly model cannot be used to explain the behaviour pricing and competitive of all firms in Singapore, since monopolistic-competitive firms and monopolies exist amidst the oligopolies. When there are few firms in the market, they may collude to set a price or output level for the market in order to maximize industry profits. This means that in contemplating a market action, a firm must take into consideration the possible reactions of all competing firms and the firms' countermoves. However, it would be irrational to price below marginal cost, because the firm would make a loss. You're now subscribed to receive email updates! Cartels are designed to protect the interests of members, and the interests of consumers may suffer because of: Higher prices or hidden prices, such as the hidden charges in credit card transactions Lower output Restricted choice or other limiting conditions associated with the transaction A classic game called the Prisoner's Dilemma is often used to demonstrate the interdependence of oligopolists. Oligopolists pursuing their individual self-interest would produce a greater quantity than a monopolist, and charge a lower price. However, this outcome is not Pareto-optimal. It provides powerful incentives for innovation, as firms seek to earn profits in the short run, while entry assures that firms do not earn economic profits in the long run.
Each individual member has an incentive to cheat in order to make higher profits in the short run. A strategy that takes five years to generate a pay-off may be rejected in favour of a strategy with a quicker pay-off.
Will the firms get a 1st - mover advantage? The problem in competing with, say, Coca-Cola or Pepsi is not that producing fizzy drinks is technologically difficult, but rather that creating a brand name and marketing effort to equal Coke or Pepsi is an enormous task.
Kinked demand curve
Banana - For example, petrol stations may sometimes offer substantial discounts or cut the price of petrol in a limited-period marketing campaign to attract more customers from rival firms. Visit the Organization of the Petroleum Exporting Countries website and learn more about its history and how it defines itself. The advantages of oligopolies However, oligopolies may provide the following benefits: Oligopolies may adopt a highly competitive strategy, in which case they can generate similar benefits to more competitive market structures , such as lower prices. This shows that profitability levels and price levels are uncertain since the actions of the rival firms are unknown and could potentially change, which is when many oligopolistic firms collude. Oligopolists may collude with rivals and raise price together, but this may attract new entrants. Colluding to charge the monopoly price and supplying one half of the market each is the best that the firms could do in this scenario.
Collusive arrangements are generally illegal. For example, during the Lunar New Year period, hawker stalls generally do not hold back from increasing prices to increase their profits.
However, each firm in an oligopoly has an incentive to produce more and grab a bigger share of the overall market; when firms start behaving in this way, the market outcome in terms of prices and quantity can be similar to that of a highly competitive market. Therefore, both firms will lower prices until they reach the marginal cost limit.
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