Features
1. Very few vendors. There are only a few vendors in the market with more than one (when there are two vendors, it is called a duopoly), and each vendor has a pivotal position in the market and considerable influence on the price of its products.
2. Interdependence. Either vendor must take the reactions of competitors into account when making decisions, and thus is neither a price setter nor a price taker, but a price seeker.
3. Product homogeneity or heterogeneity. The product has no difference, the degree of interdependence is very high, called pure oligopoly, exists in the steel, nylon, cement and other industries; product has a difference, the relationship between each other dependence is low, called the difference oligopoly, exists in the automobile, heavy machinery, petroleum products, electrical appliances, cigarettes and other industries.
4. Access is not easy. Other manufacturers to enter quite difficult, or even extremely difficult. Because not only in size, capital, reputation, market, raw materials, patents, etc., other manufacturers are difficult to match with the original manufacturers, and because of the interdependence of the original manufacturers, related, other manufacturers are not only difficult to enter, but also difficult to exit.
Oligopoly market structure is similar to monopoly competition, that is, it contains both monopoly and competition factors. But relatively speaking, it is closer to the monopoly market structure, because a few companies have a large share of the market, so that these companies have a fairly strong monopoly power. The products of oligopolistic firms can be homogeneous or differentiated. The former is sometimes referred to as pure oligopoly and the latter as differentiated oligopoly.
There are clear barriers to entry in oligopolistic markets. This is a necessary condition for a small number of firms to be able to capture the lion's share of the market, and is arguably the reason for the existence of an oligopolistic market structure. The most important and fundamental factor is that these? There are more pronounced economies of scale in these industries. If a large number of firms were to be accommodated in these industries, each would have a high average cost due to the small scale of production. Economies of scale allow large-scale production to have a strong advantage, with large firms growing and small firms unable to survive, ultimately resulting in a situation where a small number of firms compete fiercely. For firms attempting to enter these industries, unless they can develop a large scale of production from the outset and capture a more? sizable market share, the excessively high average cost will make it impossible to match the original firms.
Reasons for the formation
1. The natural formation of the market: manufacturers due to the pursuit of economies of scale, constantly expanding the scale of production, and the market is relatively small. Let's say, if the total market size of an industry is 100, and for the industry's production manufacturers, economies of scale for 30, then the market can only meet the 3 manufacturers in the economies of scale conditions of production. This creates an oligopolistic market. (Further, if the total size of the market can satisfy only 1 manufacturer to produce under economies of scale, then the market may further form a monopoly market)
2. Artificial (Institutional) Formation: Manufacturers' or state's control over resources, patents, markets, etc. is also the reason for the formation of some oligopoly markets
Major Patterns
1)? Burst point demand curves: the key to understanding oligopoly's burst point demand curves is to understand the interplay of oligopoly price changes. Because the oligopoly market is divided into a number of oligopolies, one oligopoly increases its price, other oligopolies prices remain unchanged, this oligopoly's consumers are going to buy the other oligopoly's goods, its demand will be reduced significantly; in turn, one oligopoly reduces its price, the other oligopolies will have to follow the price reduction, and then partially offset the effect of the price reduction of this oligopoly, so that this oligopoly's demand increased by a limited amount. The abrupt point of the demand curve breaks the marginal revenue curve, which is determined by the relationship of the demand curve as a line of average revenue to the marginal revenue line. The marginal cost line intersects this break and affects neither price nor output.
2) MARKET SHARE MODEL: The key to understanding market share is to follow the MR=MC rule to determine the allocation of market share. With different costs and the same demand curve and marginal revenue line, firms with low marginal costs have large market shares and low prices, while firms with high marginal costs have small market shares and high prices.
3) Price leader model: the above two cases are oligopolies each set their own prices, in fact, in many cases, it is an oligopoly pricing, the other oligopolies are just price takers.
4) game theory model: the competition between oligopolies is actually a game, that is, all parties to the competition to fully consider the options that each party may make under the existing conditions, and then make the most favorable decision for themselves.
Comprehensive advantage
Specifically, oligopoly is the objective need of mass production in modern society, oligopoly organization has comprehensive advantage.
In terms of fund-raising, due to strong economic strength, the risk of bankruptcy is relatively small, and thus it can get a lower interest rate and a larger amount of loans, so that the cost of capital is saved, and funds are guaranteed.
In terms of production, due to the huge scale of production, in most cases, it can obtain economies of scale, which makes the cost per unit of product greatly reduced.
In terms of collecting market information, conducting advertising and utilizing sales channels, it has more advantages than other enterprises.
In terms of internal management of the enterprise, it can save management costs and improve management efficiency through the implementation of the internal management system of unified command and division of labor, and also save transaction costs.
Because of the general diversification of business, the overall risk of the enterprise is smaller, and can balance the profit and loss in all kinds of business, in all aspects, and thus has a strong resilience and survivability.
In terms of technological advancement and innovation, they are more likely to keep introducing new products because they have strong financial backing and can invest heavily in research and development.
Today's products are increasingly high in technology, and the development of new products often requires a considerable number of researchers to use a large number of modern instruments and equipment for a long period of time, and the strong financial strength of the oligopoly can play an important role. Moreover, the oligopoly has the ability to comprehensively utilize the scientific research power and scientific research results, series development and waste utilization, resulting in many spin-offs.
If the oligopoly in the lack of competition in the environment, generally do not consciously pursue high efficiency, resulting in the actual efficiency is often a huge deviation from the maximum possible efficiency, high efficiency is only a possibility of the oligopoly's own natural advantages, then the oligopoly is not really exclusive market, which makes the oligopoly has to pursue high efficiency, thus making its high efficiency realistic. Thus, it makes its high efficiency realistic.
Determination of output
Collusion among oligopolies
Output is negotiated among the oligopolies
depending on the strength of each oligopoly.
No collusion among oligarchs
Each oligarch adjusts its own output based on the output of the other oligarchs
To maximize profits
Price decisions
No collusion among the oligarchs:
1) Price leadership: price decisions tend to be made by the big players.
The large firms that decide prices are often called price leaders, or dominant firms;
while small firms, like perfectly competitive firms, are price takers.
Includes:
Dominant price leaders (the largest firms in the industry)
Efficient price leaders (the lowest-cost, most efficient firms in the industry)
Barometer price leaders (firms that have a preferred view of changes in the marketplace)
No collusion among the various oligopolies:
2) Cost-plus:
Adding profit to the average cost by a certain percentage.
Example of a product with an average cost of $100 and a profit margin of 10%, the price is set at $110.
Collusion exists between oligopolies:
3) Cartel manufacturers sign formal agreements with each other to control production, share markets and maintain prices.
Formation and development
The perfectly competitive market structure promoted by Western economics textbooks, although theoretically the most efficient, is often not the case in the real-life market structure that occurs in mature industries. Oligopolistic markets, in which a few or a dozen or so firms monopolize half or more of a market, abound in real life.
Oligopoly market is a compromise between perfect competition and monopoly, this market structure is often not the design of a government, on the contrary, it is precisely the result of market selection, and in different industries have been proved, such as the U.S. automotive industry of the General Motors, Ford and Chrysler, the investment banking industry of the Merrill Lynch, Goldman Sachs and Morgan Stanley, and so on. Industrial economics guru, the University of Chicago's ?Harold ?Demsetz pointed out that efficient companies can occupy a larger market share, and with the increase in industrial concentration, the good performance of good companies is due to efficiency rather than due to market monopoly: that is, the oligopoly market structure is actually very efficient.
Of the four market structures discussed in Western economics, the monopolistic market is as rare as the perfectly competitive market, and what exists in large numbers in the real economy is the oligopolistic market and the monopolistic competitive market. Especially oligopolistic market. Schumpeter as a representative of some economists based on the fact that oligopoly enterprise organization in economic life plays an increasingly important role, pointed out that "monopoly leads to inefficient allocation of resources" point of view, is based on the assumption of perfect competition on the premise of the premise of a lack of realism, and thus the correctness of this point of view has been greatly reduced.
In fact, although monopoly is the contradictory opposite of competition, its existence does not eliminate competition, especially oligopoly changes only the form of competition, rather than competition itself. For example, the U.S. automobile market has always been characterized by oligopoly, with fierce competition among the three major manufacturers, General Motors, Ford and Chrysler.
From an international perspective, an oligopoly can, on the contrary, greatly intensify competition. For example, Kodak Film in the United States can be considered to have basically monopolized the film manufacturing industry in the United States, but due to economic globalization, it is bound to be challenged by foreign manufacturers such as Fujifilm from Japan. And as long as a country fully opens up its commodity markets, this industry can achieve a high level of competitiveness; if it further opens up its industrial investment markets, the competitiveness will be even higher.
In today's international markets, intense competition is enough to make oligopolies work as hard as possible on research and development, as efficiently as possible, and as cheaply as possible. Rather than monopolies destroying and reducing effective market competition and hindering economic and technological development, as traditional economic theory suggests.
The formation of oligopoly can avoid disorderly competition and reduce the waste of resources. In the early 1990s, local airlines mushroomed, with 16 local airlines springing up in Shanghai, Xiamen and Sichuan. Civil aviation companies from the original nine directly under the General Administration of Civil Aviation. Increased to more than 20, up to 34. Because of the "spring shoots" too much, within a few years, the market to discount air tickets as the representative of the price war for a long time to play the leading role in the disorderly competition. Directly lead to the serious consequences of the industry's declining profits, the whole industry has suffered a blow. 1998, this contradiction intensified to the apex of the domestic civil aviation industry, the whole line of negative growth. This led to a loss of 2.44 billion yuan for the whole industry.
Oligopoly can also avoid the complete monopoly of the "only one", so that the development of the industry has the power and potential of competition. Japan Railway from the formation of the early to the end of the 1970s, has been the National Railway "one world" situation, due to the monopoly on land transportation, making its centralized unity ~? The management and vertical pyramid organizational structure is relatively effective in decision-making.
But in the face of increasingly fierce market competition in the 1970s and 1980s, and the head office in each region of the business situation is not the same, and decided that its management must balance the interests of all parties, can not focus on measuring the effectiveness of the business situation of the target, coupled with the lack of a strong to the company's operating performance and the lack of a combination of compensation for the benefits of the incentive mechanism, the original national unity of the management model proved to be more and more The new model has proved to be increasingly unsuitable for the new requirements.
In the 1980s, the Japanese government began reforming the national railways, splitting them into seven companies, and through a series of steps, such as leasing, selling, and listing, the implementation of the reorganization of the various railroad companies only ten years after the implementation of the railroad companies, the economic benefits of the railroads, the efficiency and the quality of service has improved significantly and drastically. Oligopoly market structure just to avoid the disadvantages brought about by complete monopoly, so that the development of the industry and even economic development on a healthy path.