Microeconomics Essay: Oligopoly Market Structures and Competition

This essay provides an overview of oligopoly markets, a form of imperfect competition characterized by a few dominant sellers. It distinguishes between pure and differentiated oligopolies, as well as collaborative and competing forms. The essay examines how firms in oligopolies can collaborate ...Read More

Running Head: MICROECONOMICS
Microeconomics
Name of the Student
Name of the University
Author note

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Oligopoly market is a form of imperfectly competitive market, where only a few
sellers engage in selling either homogenous or differentiated product. The structure of
oligopoly market lies between pure monopoly and that of monopolistic competition. When
sellers in the oligopoly market are sell homogenous product then it is called pure oligopoly
(Baumol & Blinder, 2015). A differentiated oligopoly is one where firms sell differentiated
product. The other forms of oligopoly market include collaborating oligopoly and competing
oligopoly.
In the oligopoly market, before choosing decision regarding own price and output
firms have the opportunity to establish pairwise collaborative links with opposition firm. The
collaboration is formed with the objective of reducing production cost. The various
collaborative links together form a collaboration network. The firms collaborate with other
firms in order to share information regarding market condition, new technology as well as to
bear the joint cost of production (Kolmar, 2017). Collaboration between firms generally
strengthen the competitive position of collaborating firms. The interim collaboration thus
have an important effect on function of firms in the market. In a collaborative oligopoly,
when some firms have lot of links while others have a relatively few links then this forms
asymmetric collaboration. Another feature of collaboration is intransitive relation. There
might be a link between firm A and B, and B and C but no link between A and C.
In contrast to a collaborating oligopoly, in a competing oligopoly each firms compete
with their rival firms. The most common form of competition is the price competition among
the rival firms. One striking feature of competing oligopoly is that the market demand is not
described by the conventional demand curve (McKenzie & Lee, 2016). The price rigidity in
this form of market is captured by the kinked demand curve. The demand curve is kink
shaped because of the asymmetric behavior pattern of different sellers. When one firm
increases price then other will not follow the same as higher price leads to a reduction in

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market price. Every unit price increase is thus goes unnoticed by the rival sellers. The same
does not hold for price decrease. When one firm reduces price, others follow the same
strategy to increase its market price. This triggers a price war among rivals.
If price in the oligopoly market is completely rigid, then firms do not have incentive
to change its price. Firms then concentrate on non-price competition. The non-price
competition occurs when firm aims to maximize its sales and revenue with strategy other than
reducing price (Moulin, 2014). An alternative strategy of price competition is to spend money
of advertising. By spending on advertisements firms seek to update profile of their products
and increase brand loyalty. This will then help to enhance sales of the firm. Advertising plays
a key role in oligopolies like cars and soft drinks. Firm can alternatively introduce a loyalty
card to its customers to provide a greater assurance to the buyers. Firms in the oligopoly
market can differentiate their product from its rival to increase their revenue and sales. The
various ways to differentiate product include improvement in product or service quality, add
some extra features to its product and other.
The antitrust system has always faced problem with oligopolistic market structure.
The difficulties lies in the inherent structure of the market. In real world, the oligopoly
market is more common than pure monopoly. Here, a few large firms dominate the industry
with perfect legitimacy. A successful business that is running profitable business operation
continues to grow overtime and expand its size (Cowen & Tabarrok, 2015). The oligopolistic
sellers always seeks opportunities for anti-competitive business. Consider for example if few
large firms dominate the copper industry then their independent strategy determines the price
of copper in the industry. Now, if the firms decide to collude and takes joint decision of
setting a high price with supplying a relatively small industry output then this violates the
Sherman Antitrust act. The earned profit is then divided by the firms in collusion each
earning significantly higher profit margin. By forming cartel or any other form of collision

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thus these firms eliminate market competition, which is illegal (Carlton & Perloff, 2015). The
implementation of antitrust laws thus become necessary in the oligopoly market to prevent
such collision and anti-competitive behavior.
Oligopoly market is characterized by dominance of few large firms. Depending on the
nature of product oligopoly market is of two types- pure oligopoly and differentiated
oligopoly. In collaborative oligopoly two or more firms build a collaborative link to
strengthen their position in the market. Both price and non-price competition occur in the
oligopoly market. The price competition often triggers a price war in the market. Lastly,
firms in the oligopoly market has a tendency to violate antitrust law by forming cartel or
collision.

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References
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Cengage
Learning.
Kolmar, M. (2017). Firm Behavior in Oligopolistic Markets. In Principles of
Microeconomics (pp. 281-300). Springer, Cham.
McKenzie, R. B., & Lee, D. R. (2016). Microeconomics for MBAs. Cambridge University
Press.
Moulin, H. (2014). Cooperative microeconomics: a game-theoretic introduction. Princeton
University Press.
Cowen, T., & Tabarrok, A. (2015). Modern Principles of Microeconomics. Palgrave
Macmillan.
Carlton, D. W., & Perloff, J. M. (2015). Modern industrial organization. Pearson Higher Ed.