What are the basic characteristics of oligopoly? How does oligopoly compare with the other market structures?
What will be an ideal response?
Oligopoly exists when just a few large firms dominate a market in contrast to a pure monopoly where one firm dominates the market. The few firms often have some control over price, but that control is more limited than in pure monopoly because of the interdependence and some degree of competition in the industry. Each firm must consider the reactions of rivals when considering changes in output and price.
The barriers to entry that explain why monopoly exists also explain why oligopolies exist. These entry barriers are the result of economies of scale in an industry where economic efficiency is increased when a few firms supply output for a market. They can also arise from ownership of patents, exclusive licenses, substantial control over essential resources, and merger.
As with monopolistic competitors, oligopolies can compete on the basis of price or use nonprice competition. The role of nonprice competition is most important for differentiated oligopolies that are found in consumer goods industries producing such products as breakfast cereals, automobiles, camera film, and cigarettes. Homogeneous oligopolies that produce standardized products would engage in less nonprice competition although they might compete on the basis of service. Examples of homogeneous oligopolies would be firms that produce metals (steel, aluminum, or copper) or chemicals. Oligopolies are common throughout American industry.
The purely competitive firm produces a standardized product at the market price. Unlike oligopoly, the firm is small in size, there are no interdependencies among firms, the firm has no control over price, and uses no advertising or nonprice competition.
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