Oligopolistic Market Structures And Management Of Them Economics Essay

Oligopolistic Market Structures And Management Of Them Economics EssayOne constructive coming of categorizing a foodstuff is by dividing it in terms of the number of immobiles on the supply side of the market and the buyers concentration on the demand side. Oligopoly represents iodine of the market building where there be a very some firms on the supply side and a huge concentration of buyers on the demand side. As the buyers erect non affect the market conditions, they be going to larn it as such(prenominal) and the supplier bequeath be busy in anticipating the rivalry conduct.Oligopoly looms large in industries of steel, petroleum, automobiles etc. Many industries can blend geographic in ally as oligopolies. For example banking in a small town operate as oligopoly since there will be one or both banks in the argona and the residents will be labored to have a bun in the oven their business to the local banks.( Friedman, 1983)Oligopoly a complex market structureOlig opoly is close a big business. Under this market structure, the rivalry reappearances on its wrap up form. Product innovations, aggressive advertising and innovative marketing tactics be frequently applied to outweigh each other. Oligopolistic market structures ar the nearly difficult to analyze as they are highly interdependent and interwoven, where moves and countermoves are taken rapidly. For example a simple action by crossing may crown to a reaction by General Motors, which in turn cause a readjustment in Fords plan, thereby modifying GMs solvent and so on. So anything can happen anytime in oligopoly.There are few models that highlight oligopolistic behavior. They areCartelsA sheath arises in monopoly when all the firms attempt to promote interdependence and they all mutually agree to strike off terms and out gravel. The firms done their mutual coordination try to create a giant star monopoly. OPEC (Organization of Petroleum Exporting Countries) is an example of a cartel platform. harm leading and Tacit CollusionIt is an arrangement in which one or two firms sacrifice an arrangement of the pricing for the entire firm. Other firms are forced to follow the same price pattern although no such capital of New Hampshire exists in the industry.For example In the infant formula industry, Abbot laboratories, Bristol Myers Squibb and American Home Products deliberately set their prices closer to each other to take a leak the industry.The Kinked Demand CurveThis model elaborates the stickiness in pricing in an oligopolistic structure. It has been hypothesized in this model that if for example, a firm X lowers its price in an oligopolistic market, the rival will be forced to lower its price to in place to avoid the loss of its market base. The demand wrench dd is thus the relevant snub in case of a price reduction.dHowever, if the firm X goes for a price increase, then the case wont be the same. The rivals will not imitate this time, and would c ontinue to enjoy the customer support as they would flee the firm X products. In this case the demand curve would be DD. The firm then tries to remain in a section of the elastic demand curve between dd and DD. The true demand curve is represented by DAd, known as the kinked demand curve which silently points out the fact heads you lose, tails you lose (Baumol and Blinder, 2009)DAPrice8(Competitors prices are fixed)7Dd(Competitors respond to price modifications)0Quantity per year1,4001,1001,000Game hypothesis and the OligopolyGame theory has been formulated to understand the behavior of the firms in an oligopolistic market structure that do not work on a collaborated sidetrack and pricing. The underlying guess is that the large bossy firms are like players in a hazard of poker. They confuse the moves of lowering or increasing the price, to crowd or not to tell, to discount and so on, based on their rivals move. Understanding the payoffs can put a firm in a better position to contend with its rival and be in a profit maximizing and perspicacious position.For example the game between two coffee shops is illustrated as at a lower placeCDocuments and SettingsAnumDesktop4th assignmentUnderstanding Oligopoly Behavior a Game Theory overview Economics in Plain English_filesgame-theory-1.jpegSource Welker, J. (2009).Understanding oligopoly behavior-A game theory overview. Avail fitting from http//welkerswikinomics.com/blog/2009/12/15/understanding-oligopoly-behavior-a-game-theory-overview//According to the to a higher place figure, both San Francisco coffee and Starbucks is following a dominant strategy. They are works up to maximize their outcome through advertising, ignoring what their competitor does. If S.F advertises, Starbucks earns profit ($12 vs. $10) through advertising. This means the pay offs are the same. Since both firms are enjoying profit through advertising they will do so, though the total profits are less in case when both are advertisi ng, as compared to when they are not advertising. But such a condition would be a condition of inst tycoon, as to advertise is seeming to be beneficial for both. So we say that advertise/advertise is Nash equilibrium, as at this stage none of the firm is going to change its strategy since it is bringing incentives to both (Jason Welker, 2009).Market harm due to Oligopoly retentiveness in view the above theories that try to explain oligopolistic behavior, the market failure due to oligopoly can be attributed to various causes. Inefficiency, instability and indeterminacy brought to the highest degree by oligopoly may result in a market crash. The firms domination is established as the capacity is established more and more, but bitty is produced in order to create artificial barrier to entry. The competitors struggle on the basis of non pricing factors such as heavy advertising, which gives more hold up to the artificial barrier to entry. Prices are well above represent and pric e discrimination prevails. Some of the firms excessively engage in self-regulation to carry through their own profits and market share that further detoriate the situation (Grewal and Kumnick, 2006). Oligopolistic firms output and prices substantially differ from what is socially accepted from them. It is also believed that the misleading advertising by the large firms also deludes the consumers and compels them to buy products that they do not want. They levy political and economic power and hover over the mind of the consumers working like an invisible hand.Market FormNumber of firms in the marketFrequency in RealityEntry BarriersPublic Interest Results foresighted Run ProfitEquilibrium ConditionsOligopolyFewProduces Large share of gross domestic productVariesVariesVariesVariesSource Economics Principles and Policy By William J. Baumol, Alan S. BlinderMC=MR applies for a profit maximizing firm, under equilibrium. However, in oligopoly, MC is usually mismatched to MR mainly be cause in oligopoly the firms are seeking to adopt strategies in treaty with the game theory, or they look for techniques such as increasing gross sales for profit maximization as their ultimate goal.ConclusionIn a perfectly agonistic market place the behavior of the firms automatically lead to a maximization of consumer benefits through an efficient allocation of imagerys. In oligopoly however, resource allocation is usually is not well set, more focused is pay on restricting output in an attempt to maneuver prices and profits. In an oligopoly everything is possible, can happen anytime anywhere, so the economists are still unable to distinctly predict its behavior. Besides, its ability to lead the market down, some economists are of the spirit that oligopoly has made a significant contribution towards the economic growth in the past two decades resulting in an increase in the average income of the well-off countries.(Baumol and Blinder, 2009).Question twoWhat are the implica tions for management of businesses in such structures? incomingOligopoly is a market characterized by a few firms. Managers of a firm in such a structure know that their firm enjoys a market power. But the other players have their share of power too. If the passenger cars take the right course of action, properly assessing the behavior of their rivals in the industry, they are likely to make a profit.Strategic behaviorStrategic behavior refers to the firms ability of proper consideration of their market power and awareness of their rivals move. Strategic behavior occurs in oligopolistic structures where there is less product differentiation and a competitive industry exists (Taylor and Weerapana, 2009)Implication for the managersThe most important implication for the managers regarding oligopoly is the pricing fare on the basis of mutual interdependence. In case of monopoly, the absence of rival enables the managers to follow the MR=MC role to maximize its profit. However in Olig opoly, entirely following the MR=MC isnt just enough.ExampleConsider, for example the case of monitor and Gamble, where the manager hires a consultant for the thorough analysis of the cost, structure and demand. later a detailed analysis of the structure of the body soap products, the manager follows the MC=MR rule and set the retail price at $1.99.In a sudden move, the competitors Colgate-Palmolive , Lever brothers etc set the price of the comparable product 10 to 15 below to that of proctor and gamble. What the manager is likely to do? any he can go for advertising and heavy promotion to compete against the lower prices of the competitors or can lower its prices down. Or he can simple do nothing if he is confident enough of the immobile loyalty that his brand enjoys among consumers. The point is that, that pricing in oligopolistic structure cannot be done without taking into account your competitor. This is the essence of mutual interdependence (Young and McAuley,1994)The he re and now implication for the managers is to understand that it can be extremely difficult to make money in a competitive market. Firms are required to be as much cost efficient as possible because they cannot tick the prices.The managers are supposed to be vigilant enough to be able to spot opportunities and enter the market before the others could enter. They should be able to make their place before the demand gets high enough to support an above normal price.A situation could arise in oligopoly, where the managers in a firm become so successful in beating up the contender that the firm turns into a monopoly, or the one that can illustration monopolistic power. Such a case happened with IBM when In 1969, the firm dominate the computer market so much so, that the department of Justice had to field of study an antitrust suit against it (Keat, Young and Benerjee, 2009)Global implication for managersThe managers should keep in mind that the process of benchmarking in an oligopo listic structure strategy formulation should be done keeping in view both domestic as well as the global competitors.For example AT T communications not only took into account Northern telecom but also Siemens, Ericsson and NEC and Fujitsu.Many of the firms that refuse to take challenge from the foreign firms are likely to face consequences. Like many American firms got a sombre blow from their Japanese competitors in the past 20 years. Companies like IBM and kat enjoys success because they established a strong hold in the Japanese market well before time.The oligopolistic structure also highlighted the importance of adhesion for the managers. Alliances enable the firm to acquire applied science from the rival firm. Whilst the acquisition of the technology can be a source of benefit for the firm, the firm give up the technology can face causalities ( Yoffie,1993)ConclusionThe managers of an oligopolistic market structure have to take into account several aspects in their decis ion making. The managers are plunged into complex pricing decision. They take into consideration the three Cs of Cost, customers and competition in their decision making. Price wars were common in an oligopolistic market, but they are becoming less frequent with the passage of time, mainly due to the identification of the managers. Managers have understood, through their bitter experiences, that the price wars are costly and do not bring any benefits. They chose to compete on the advertising and on product variations. So they have chosen not to compete on prices and have found for themselves a path of mutual advantage.