Three examples of oligopolies in the United States are industries that produce or sell
An oligopoly is a market structure that involves a small group of large companies that have all or almost all sales in the industry and often collude to reduce competition. The level of competition among firms within this market system is lower, while companies have monopoly power and obtain higher revenue. Show
Why do oligopolies exist?Companies often collaborate to set a specific price or an output rather than compete with each other because of several economic benefits oligopolies allow to obtain. Firms in oligopolies control the prices, making it more difficult for other businesses to enter the market. This way, they prevent the emergence of new competitors that can hinder their business growth. However, new companies can charge lower prices and jeopardize the longevity of revenues that colluding companies have. You can find oligopolies among steel manufacturers, oil companies, railroads, airlines, and pharmaceuticals. In this market structure, companies choose to obtain the benefits of their collaboration rather than compete. They set prices together or choose a leader that will increase the prices, and other firms will follow. Now that you know why oligopolies exist, let’s talk about the top features this market structure has. 5 Features of Oligopolies
There are four main types of market structures: pure competition, monopoly, oligopoly, and monopolistic competition. We’ll now review the main features of this market system to distinguish an oligopoly from other market forms.
Now it’s time to move to the pros and cons of this market structure. Advantages and Disadvantages of OligopoliesCompanies in oligopolies are large, and they set standards to control prices and competition. You might have asked yourself why oligopolies are so widespread, especially in mass media, the tech industry, airlines, entertainment, and social media platforms. The answer is simple — because of the advantages that this market structure brings to businesses. They include the following pros:
However, everything has drawbacks, and oligopolies have them too. The major cons are:
Now that you know the advantages and disadvantages, let’s proceed to the next section to learn how an oligopoly works. How does an oligopoly work?In oligopolies, collusion processes are sequential. They are necessary to define the price and output or boost the profit. That’s why this market structure is somehow similar to a monopoly — it consists of a few big companies that collude to obtain the necessary results. By increasing the price, they have an opportunity to receive higher profits and produce a smaller amount of goods. However, collusive oligopolies are risky since the most efficient companies will break ranks by reducing their prices. These firms break the agreement mainly to increase their market share. A threat of defection, low level of coordination, and illegal price-fixing are the factors that deter collusion. That’s why these companies often face the possibility that one of them can agree to collude, then break the agreement, and undercut the revenue. Now that you know how this market structure works, we’ll proceed to the difference between an oligopoly and a monopoly. Oligopoly vs. MonopolyLet’s review the features of these two market systems to make the difference between them clear. In an oligopoly, there are two or more companies that control the market. In this market structure, no firm can keep the others from influencing the industry and offering goods that differ a little bit. Since it doesn’t have any superior force, firms prefer to collude rather than compete. This strategy makes it extremely difficult for other players to enter the market. In a monopoly, there’s one dominant firm that sells goods or provides services. A company in this market structure has enough authority and power to prevent competitors from entering the marketplace. There might be various reasons that make it difficult to enter the industry, such as technology, patents, government regulation, or capital requirements. In a monopoly, we can find only one seller, a price maker who can set high prices and reduce the choice for customers. Nevertheless, buyers will pay the price if there are no substitutes available. Let’s move to the next section, where we’ll walk you through the types of an oligopoly. Types of OligopolyFurther, we’ll review four main types of this marketing structure based on the relationships between companies within the market:
Next, we’ll discuss the pricing strategies of oligopolies, so let’s dive in. Pricing Strategies of OligopoliesCompanies in oligopolies can use predatory pricing, which means keeping prices very low, sometimes even under the full cost of production. This strategy is used to force competitors out of the market. Besides, firms also implement a limit-pricing strategy to hinder new companies from entering the market. In this scenario, firms reduce the price sufficiently and make it unprofitable for other players to enter. You can also encounter cost-plus pricing in this market structure. It’s a strategy in which the price of a good is defined by adding a specific markup to a product’s unit cost. It is useful for oligopolies and firms that manufacture different products since a few companies that dominate the market often share the same expenses. One of the examples is petrol retailers. Nevertheless, there is always a risk because competitors can adopt a more flexible method to obtain a bigger market share. If you want to compete in an oligopoly market, you should know the main peculiarities of this market system, which we’ll discuss next. How to Compete in the Oligopoly MarketThe interdependence that exists within an oligopoly determines the way companies compete. The decisions on the price and output of the firms within this market system depend on the behavior of other companies. Businesses that operate under the rules of an oligopoly can’t act independently. They usually take into account the actions of their closest competitors when making decisions. Let’s take Texaco, a company that operates in petrol retailing, for example. Say, the company wants to get a bigger market share by cutting down the price. If their competitors Shell and BP find out about this, they can reduce their prices as well. The way firms compete in an oligopoly depends on their objectives, the nature of their goods or services, and the contestability of the market. Some firms compete on the price, and others try to enhance the quality of their products. When trying to demonstrate their benefits to the leads and customers, oligopolists prefer to implement non-price competition. It involves distinguishing products or services to increase sales by using methods other than price. Now that you know how companies compete, it’s time to discover how to enter this market. How to Enter the Oligopoly MarketOligopolists always maintain their dominance in the market and establish high barriers to entry, which makes it hard for new players to enter. When giving thought to entering this market structure, remember that there will be obstacles, such as economies of scale and patents, government regulations, and expensive technology. Companies need to overcome these and other challenges if they want to be a part of an oligopoly. However, this does not have to discourage but motivate you to develop a well-thought-out strategy. Let’s dive into several examples to help you grab some inspiration. Examples of OligopoliesNowadays, you can find different oligopolies in various industries. If you are curious about corporations that belong to specific market structures, we’ll walk you through some of them.
You can see multiple examples of oligopoly in your everyday life: platforms you use for communication, operating systems of the smartphones or laptops you buy, and search engines you know. Now you can easily distinguish this market structure from others. Resources:
Last Updated: 28.10.2022 Which of the following is the best example of an oligopoly in the United States?Answer and Explanation: The correct answer is a. The best illustration of an oligopoly is the automobile industry.
What are three examples of firms that are oligopolies for differentiated goods?Third, oligopolistic firms may produce either differentiated or homogeneous products. Examples of oligopolistic firms include automobile manufacturers, oil producers, steel manufacturers, and passenger airlines.
What are the products of oligopoly?However, because the production of the products requires large amounts capital and exhibits steep economies of scale, the entry of firms is limited. Products produced by a differentiated oligopoly include electronics, cereals, cigarettes, sporting goods, motor vehicles, and aircraft.
Which is an example of an oligopoly quizlet?An oligopoly is a market structure in which many firms sell products that are similar but not identical. The market for crude oil is an example of an oligopolistic market.
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