What is oligopoly? Features, characteristics, examples of oligopoly in the modern market. Types of market structures: perfect competition, monopolistic competition, oligopoly and monopoly
In economic theory, much attention is paid to the problems of market structure. As you know, perfect and imperfect competition are distinguished. If perfect competition is a somewhat idealized model of market structure, then imperfect competition is quite real.
Imperfect competition includes oligopoly, monopolistic competition and monopoly. In this work, we have focused on oligopoly.
An oligopoly is a market situation in which a few large firms dominate an industry.
It is believed that the term "oligopoly" was introduced into economic literature by the English utopian socialist Thomas More (1478-1532). The term comes from two Greek words: oligos - several; roleo - to trade.
According to some sources, the term "oligopoly" was introduced into scientific circulation by the English economist E. Chamberlin.
In an oligopolistic market, competing firms use price controls, advertising, and output. They behave like armies on the battlefield. The interconnection of oligopoly firms is manifested in various forms of their behavior from price wars to collusion. In the oligopoly model, the firm has the ability to implement optimal policies, taking into account the actions of its competitors.
In recent years, the state has been paying increased attention to problems related to the state of competition, as well as the suppression of violations of antimonopoly legislation. The antimonopoly legislation has been updated, the sanctions for its violation have been significantly toughened.
The urgency of the problem lies in the fact that in the conditions of the Russian economy, the oligopoly significantly affects the development of the country. This is especially true in modern times of crisis, when there is a redistribution of property, reduction of players in the market, various mergers and acquisitions. The task of the Federal Antimonopoly Service is to prevent the emergence of new monopolistic and oligopolistic structures, collusion, price increases, etc.
The object of study in our work is the oligopolistic market.
The subject of the research is the economic relations arising between the subjects of the oligopolistic market, the state and other firms in the field of production, pricing, and sales.
The aim of our work is to analyze oligopoly models.
To achieve this goal, it is necessary to solve the following tasks:
Consider the theoretical foundations of oligopoly;
Identify the reasons for the formation and differences of oligopoly;
Describe the main theories of oligopoly;
Carry out a comparative characteristic of oligopoly models.
The theoretical basis for writing the term paper was the work of S.N. Ivashkovsky, S.S. Nosova, A.G. Gryaznova, T.V. Checheleva, M.I. Plotnitsky, I.E. Rudanova. The work also used the magazines "Society and Economics", "Voprosy Economiki", as well as Internet sources.
1 THEORETICAL BASIS OF OLIGOPOLY
1.1 The essence of oligopoly
Oligopoly is a fairly widespread, most complex and least predictable structure. A small number of competing firms and a large number of consumers make it possible for oligopolists to explicitly or implicitly coordinate their actions and act as a single monopoly. The peculiarity of oligopoly is that each manufacturer must make a decision taking into account the possible response from competitors.
The word "oligos" in translation from Greek means little. Oligopoly is the dominant modern market structure. It is characterized by the fact that only a few firms (up to 10-15) produce all or a significant part of the products, there is a large number of consumers on the market.
An oligopoly is a market structure in which there are several sellers and the share of each of them in total sales in the market is so great that a change in the amount of products offered by each of the sellers leads to a change in price.
An oligopoly is a situation in which the number of firms in the market is so small that each, when forming its pricing policy, must take into account the reaction from competitors. Oligopoly can be defined as a market structure in which the markets for goods and services are dominated by a relatively small number of firms producing homogeneous or differentiated products.
The number of subjects of an oligopoly may be different. It all depends on the concentration of sales in the hands of a particular firm. According to some economists, the oligopolistic structures include such markets, which concentrate from 2 to 24 sellers. If there are only two sellers on the market, this is a duapoly, a special case of an oligopoly. The upper limit is conditionally limited to 24 economic entities, since, starting from the number 25, the structures of monopolistic competition are counted.
Oligopoly has the following features:
The presence of several firms, a small number of manufacturers;
Price control limited by mutual dependence or significant by collusion;
Significant economic and legal obstacles to entry into the industry (first of all - economies of scale, patents, ownership of raw materials);
Interdependence, suggesting a competitor's response, especially when conducting pricing;
Non-price competition, especially with price differentiation.
Many of these features are characteristic of other market structures as well. Therefore, it is impossible to construct a single model of oligopoly.
Oligopoly can be rigid, when the market is dominated by two or three firms, and vague, in which six or more firms share 70-80% of the market.
From the point of view of the concentration of sellers in the market, oligopolies can be divided into dense and sparse. The former include such sectoral structures, where two to eight sellers are represented, the latter - more than eight economic entities. In the case of a dense oligopoly, various kinds of collusion are possible regarding the agreed behavior of sellers in the market due to their limited number. With a sparse oligopoly, this is practically impossible.
From the point of view of the characteristics and nature of the products produced, oligopolies are divided into homogeneous and differentiated ones. The former are associated with the production and supply of standard products (steel, non-ferrous metals, building materials), the latter are formed on the basis of the release of a diverse range of products. They are typical for industries in which it is possible to differentiate the production of the offered goods and services.
Oligopoly is more widespread in industries where large-scale production is more efficient and there are no ample opportunities for differentiating industry goods. This situation is typical for the manufacturing, mining, oil refining, electrical industries, as well as for wholesale trade.
Under an oligopoly, not one firm operates in the industry, but a limited number of competitors. Therefore, the industry is not monopolized. By releasing differentiated products, firms that form an oligopoly compete with each other using non-price methods, and react to changes in demand mainly by changes in the volume of production.
The behavior of the oligopoly in relation to price and output is different. Price wars bring prices to their level in a competitive equilibrium. To avoid this, the oligopolies can conclude secret agreements of the cartel type, secret gentlemen's agreements; align their behavior in the market with the behavior of the industry leader.
When determining prices and production volumes, oligopoly takes into account not only consumer behavior (as is done in other market structures), but also the reaction of its competitors. The dependence of the behavior of each firm on the reaction of competitors is called the oligopolistic relationship.
The interrelation of the subjects of the oligopoly is especially clearly manifested in the pricing policy. If one of the firms lowers the price, others will immediately react to such an action, otherwise they will lose buyers in the market. Interdependence in actions is a universal property of oligopoly.
Firms are interconnected in terms of determining their sales volumes, production volumes, the amount of investment, the cost of advertising. For example, if a firm wants to launch a new product or a new product model, then it makes every effort to advertise that product. But at the same time, the firm must understand that it is being watched by other oligopolistic firms. And in the case of advertising campaigns, competitors will begin to behave in the same way. They will also create a similar product or model.
This situation is determined by the fact that all firms understand that the goals, objectives, decisions of competing companies are determined by the behavior of other firms. And when making decisions, you need to understand this and expect a response from the competitor.
At the same time, oligopolistic interdependence is both positive and negative. Firms-oligopolists can unite their efforts in the fight against others, turning into a kind of pure monopoly, achieving the complete disappearance of competitors in the market, or they can fight against each other, turning the market into a kind of market of perfect competition.
The latter option is most often implemented in the form of a price war - a gradual decrease in the existing price level in order to oust competitors from the oligopolistic market. If one firm has lowered the price, then its competitors, sensing the outflow of buyers, in turn, will also lower their prices. This process can take place in several stages. But the price reduction has its limits: it is possible as long as prices for all firms do not equal the average costs. In this case, the source of economic profit will disappear and a situation close to perfect competition will reign in the market. From such an outcome, consumers, naturally, remain in a winning position, while manufacturers, one and all, do not receive any benefit. Therefore, most often the competition between firms leads to their decision-making taking into account the possible behavior of their rivals. In this case, each of the firms puts itself in the shoes of competitors and analyzes what their reaction would be.
The pricing mechanism under oligopoly has two interrelated features. This is, firstly, the rigidity of prices, which change less frequently than in other market structures, and, secondly, the consistency of the actions of all firms in the field of pricing.
Pricing policy in an oligopoly is carried out using the following basic methods (some economists consider them to be principles): price competition; collusion about the price; leadership in prices; price cape.
Price competition in an oligopoly is restrained. This is connected, firstly, with weak hopes of achieving market advantages over competitors, and secondly, with the risk of unleashing a price war, which is fraught with negative consequences for all its subjects.
Pricing collusion allows oligopolists to reduce uncertainty, generate economic profits, and discourage new competitors from entering the industry. Oligopolies agree to maximize profits on a limited scale, sometimes even to reduce them to zero in order to block the invasion of the industry by new producers.
Leadership in prices develops in a situation where the increase or decrease in prices by the company dominating in the oligopoly is supported by all or most of the companies in the market. In an oligopoly, as a rule, there is a large firm that acts as a price leader. Changes in prices occur only if there are noticeable deviations in the cost of certain factors of production or changes in the conditions of the operation of the enterprise or the output of products.
A price cap (usually in the amount of a certain percentage) is added to the average total cost of production. It is designed to take into account the actual or possible competition, financial, economic and market conditions, strategic goals, etc. This principle is known as "costs plus". The cloak provides profit, determines the behavior and actions of the company.
Oligopolies have positive and negative consequences. The following points can be noted as positive:
Large firms have significant financial resources for scientific research, technical innovations;
Competition between firms belonging to oligopolies contributes to the development of scientific and technological progress.
These positive aspects were noted by I. Schumpeter and J. Galbraith, who argued that large oligopolistic firms are able to be technically progressive and finance research and development work to achieve high rates of scientific and technological progress.
According to other economists, the advantages of oligopoly are the absence of the destructive force of competition that exists in a free market, lower prices and higher quality products than in a monopoly; the difficulty of penetration of outside firms into oligopolistic structures due to economies of scale.
Finally, economists also note the fact that, on the whole, oligopolistic monopolies are necessary for society. They are entrusted with an exclusive role in accelerating scientific and technological progress, since they are able to finance expensive scientific projects.
The negative aspects of oligopoly boil down to the following:
Oligopolies are not so afraid of competitors, since it is almost impossible to penetrate the industry. Therefore, they are not always in a hurry to introduce new techniques and technologies;
By entering into secret agreements, oligopolies seek to benefit from buyers (for example, increase the prices of products), which reduces the level of satisfaction of people's needs;
Oligopolies are holding back scientific and technological progress. Until the maximization of profit on the previously invested large capital is achieved, they are in no hurry to introduce innovations. This prevents obsolescence of machinery, equipment, technologies and products.
1.2 Reasons for becoming and O types of oligopoly
The following reasons for the formation of an oligopoly are distinguished:
Possibility in some sectors of efficient production only at large enterprises (economies of scale);
Ownership of patents and control over raw materials;
Absorption of weak firms by stronger ones. Such a takeover is carried out on the basis of financial transactions aimed at acquiring an enterprise in whole or in part by purchasing a controlling stake or a significant share of capital;
The effect of a merger, which is usually voluntary. When several firms merge into one, a new firm can achieve a number of advantages: the ability to control the market, price, purchase raw materials at lower prices, etc .;
Scientific and technological progress, which is associated with a significant expansion of production in order to realize economies of scale.
The differences on which the model of oligopoly as a special type of market structure is based are fewer and more realistic compared to the assumptions underlying the models, for example, perfect competition or monopoly.
1. Influence of the concept of product homogeneity. If, in the model of perfect competition, the homogeneity of products manufactured (sold) by different economic agents is one of the most important assumptions, and heterogeneity, or differentiation, of products is the defining assumption in the model of monopolistic competition, then in the case of oligopoly, products can be both homogeneous and heterogeneous. ... In the first case, they speak of a classical, or homogeneous, oligopoly, in the second, of a heterogeneous, or differentiated, oligopoly. In theory, it is more convenient to consider a homogeneous oligopoly, but if in reality the industry produces differentiated products (many substitutes), we can, for analytical purposes, consider this set of substitutes as a homogeneous aggregated product.
An oligopoly is called classical (or homogeneous) if firms in an industry produce homogeneous products, and differentiated (or heterogeneous) if firms in an industry produce heterogeneous products.
2. Few sellers opposed by many small buyers. This means that buyers in the oligopoly market are price recipients; the behavior of an individual does not affect market prices. On the other hand, the oligopolists themselves are price seekers; the behavior of each of them has a tangible effect on the prices that rivals can receive for their products.
3. Opportunities for entry into the industry (market) vary widely: from completely blocked entry (as in the monopoly model) to relatively free. The ability to regulate entry, as well as the need to take into account the possible reaction of rivals when making decisions, forms the strategic behavior of oligopolists.
2 Basic theories of oligopoly
The most pronounced form of implementing cooperative behavior is a cartel, which is an agreement on the parameters of an industry supply. The tendency of firms to coordinate their actions through a formal agreement on the volume of output and the price of the product produced by the industry is due to the difficulty of diagnosing the reactions of competitors. The substantive aspect of the cartel agreement is the limitation of sectoral output to a level that ensures the receipt of monopoly profits by firms in the sector, which is achieved by coordinating the output of individual firms to volumes that would, in total, ensure the establishment of monopoly equilibrium.
A cartel is a group of firms united by an agreement on the price and division of the market between the participants in order to obtain monopoly profits.
Organizationally, a cartel can take many forms. Firms can limit themselves to negotiating a price agreement with the goal of avoiding price competition, but leaving the possibility of non-price competition for market share. A tougher form of cartel is the establishment of production quotas, supplemented by control over all types of competitive activity. The cartel can be realized in the form of a specially created sales organization, which, buying up products from individual manufacturers at a negotiated price, will then sell these products, taking into account coordination.
If two firms, A and B, operate on the sectoral market, then market equilibrium will be established based on the position of the market demand curve D 0 Tp and the sectoral marginal production cost curve, which are determined by horizontal summation of the marginal costs of firms (MC A + MC B). If firms operate in conditions of pure competition, then the industry will be in equilibrium at price P k and volume of output Q k. At this price, firm A will operate on the break-even principle, producing output in the amount of q A k, and firm B, producing output q, will receive a small profit, the size of which is equal to the area of the dark-colored rectangle. Firms can improve their position if they reduce total output to a volume that maximizes industry profits, that is, for which the equality MR = (MC A + MC B) holds. With the volume Q kr and the corresponding price P kr, the branch profit will be maximum. However, such an outcome is only possible if firms reach an agreement to maintain industry output at a level that maximizes industry profits. Consequently, the main task is to distribute production quotas between firms in such a way that their total output is equal to Q kr. Such quotas are determined based on the intersection of the horizontal line obtained from the intersection of MR = (MC A + MS B), with the marginal cost curve of each firm. As a result, firm A's production quota will be q A kr, and firm B's quota will be q B kr. By selling the product at a single price P kr, both firms will improve their position. Firm A will make an economic profit equal to the area of the shaded rectangle. Firm B will increase its profit, as evidenced by the excess of the area of the shaded rectangle over the area of the dark-colored rectangle.
With a large number of firms and significant differences in the market shares they control, reaching agreement on price and volume is extremely difficult. The greater the heterogeneity of the product produced by firms in the industry, the weaker the incentives to pursue a joint strategy. When industry barriers are low and cannot prevent “outsiders” from entering the market, the cartel agreement loses its meaning, since it can be destroyed at any time as a result of the invasion of the market by an outsider, that is, a firm that is not a member of the cartel. If firms have significant excess capacity, they are tempted to use that capacity, and thus violate the terms of the agreement. When industry demand rises, firms are able to exercise bargaining power without resorting to cartel agreements. At high rates of scientific and technological progress, the value of the cartel agreement is sharply reduced, since firms can easily bypass it, using the opened opportunities for restructuring technology or introducing a new product to the market. The nature of the anti-monopoly policy pursued by the state is also of great importance: the tougher such a policy, the less the likelihood of cartels emerging, and vice versa.
Secondly, even if a cartel is formed, the problem of maintaining its stability arises, which is a much more difficult task than its creation. There are many reasons for the instability of cartel agreements. First of all, the target preferences of firms may differ, some of which will focus on achieving short-term goals, while the other part will pursue long-term goals. All this will form the basis for a violation of the cartel agreement. The reasons for the instability may be rooted in the difference in assessments of the validity of the parameters of the cartel agreement on the part of individual firms. If firms have significant differences in production costs or in the market shares controlled by each firm, then it will be difficult for them to agree on an equilibrium price and volume. For a firm with a higher cost level (MC A), it would be optimal to set a price P A with a volume of Q A, while a firm with a lower cost level (MC B) prefers a lower price P B with a larger volume of output Q B. A similar problem arises in the case of the same costs (MC A = MC B), but with different market shares D A and D B. Firm B regards as the optimal price P B, which provides it with the maximization of profits. However, for firm A, given the demand for its product (D A), such a price is unacceptable, since it leads to an unreasonable reduction in output and profits.
The next general conclusion from the above is that the success of a cartel depends on the willingness of its participants to follow the agreements reached, as well as their ability to identify and effectively suppress the actions of violators. Turned into a practical plane, such a requirement is fulfilled only if three conditions are met. The first is that the procedures for monitoring compliance with the agreement are cost-effective, that is, do not require high costs. As such, reference prices can be used, a territorial or segment division of the market, the creation of a common sales company. The second condition is related to the speed of detecting violations, which depends on the availability, reliability and speed of obtaining information: the more firms are included in the cartel, the more differentiated the circle of consumers of the industry's product, and the more varied the contracts used, the more difficult it is to identify violators. The third condition is the effective effectiveness of the sanctions applied against the violators, which must exceed the benefits obtained from the violation of the agreement. Sanctions can take the form of fines, quota caps, and “punishment in kind,” in which the cartel dramatically lowers prices and expands production to drive violators out of the industry market.
Since a common practice for modern economies is legislative prohibition and legal
pursuit of cartel agreements, the possibility of implementing cooperative behavior in this form is extremely difficult. Meanwhile, in the oligopolistic market, firms can coordinate their actions in an implicit form. One form of covert cooperative behavior is price leadership.
Price leadership occurs when a firm operates in an industry market that has strategic advantages over its competitors. The firm may have advantages in cost or in terms of product quality. The determining factor, however, is its control of a significant share of the industry market, which ensures it a dominant position. The dominant position in the market allows the leading company, on the one hand, to obtain more complete information about the market, and on the other, to ensure price stability by controlling a significant share of the market supply. The mechanism of the price leadership model is that the leading firm sets the market price for the product, taking into account the prevailing market parameters and the goals pursued, while the rest of the industry firms (followers) in their pricing policy prefer to follow the leader, taking its price as a given ...
In the context of price leadership, market coordination is achieved through the adaptation of firms to the price set by the leader, which is the factor that determines the conditions of production for all firms in the industry market.
In the absence of a dominant firm in the market, price leadership can be realized by combining several firms into a group pursuing an agreed pricing policy.
The implementation of the price leadership model presupposes the presence of certain prerequisites. The leader controls a significant share of the market supply and has significant advantages over followers. It is able to determine the function of industry demand and the distribution of production capacity in the industry. In this case, the essence of oligopolistic interaction in this model is that the price that maximizes the profit of the price leader is a factor that sets the conditions for optimizing production for other firms in the industry market. Therefore, a distinctive feature of this interaction model is the sequence of decision-making, and not their simultaneity, as was the case in the previous model.
Knowing the market demand curve D and the supply curve of followers S n = XMC n, the price leader firm determines the demand curve for its product D L as the difference between industry demand and competitors' supply. Since at a price ¥ x all industry demand will be covered by competitors, and at a price P2 competitors will not be able to supply and all industry demand will be satisfied by the price leader, the demand curve for the leader's products (D L) will take the form of a broken line Pl. Optimizing its output in accordance with the profit maximization principle MR L = MC L, the price leader will set the price P L at the output volume q L. The price set by the leader is accepted by the followers as equilibrium, and each of the following firms optimizes its output in accordance with this price. At the price P L, the total supply of followers will be q Sn, which follows from P L = S n.
The behavior of a leader firm is determined by factors such as the size of the leader's industry share, the difference in production costs between the leader and the followers, the elasticity of demand for the leader's product, and the elasticity of the supply of followers. The most significant parameter in the above list is the parameter of production costs: the greater the difference in the average costs of a leader and followers, the easier it is for the leader to maintain price discipline. Moreover, the leader's cost advantage can be relative, being a consequence of economies of scale, or it can be absolute when the leader uses more efficient technology or has access to cheaper resources. Absolute cost advantages allow the leader firm to literally dictate market conditions to its followers.
Suppose, given the market demand D, the demand for the leader's product is presented as D L, and his production costs as MC L = AC L. The leading firm has absolute advantages in the level of average costs - AC L However, having an absolute cost advantage, the leader can set the price below the level of the minimum values of the followers' average costs, up to the level of his average costs, for example, P 1. At this price, there is no optimal output for the follower firms, since they will incur a net loss for any volume of production. Ultimately, followers will be pushed out of the market, which in this case is completely monopolized by the leading firm. Having eliminated the competitive environment, the leader captures all market demand and sets a monopoly price P m, which allows him to increase profits by. At the same time, despite the seemingly most favorable outcome for the leading firm, this behavior carries with it some threats in the long run. Ensuring that the leader receives monopoly profits, the price of P m simultaneously sharply lowers the industry barrier to entry, creating not only favorable opportunities for the resumption of activities in the industry of competitors, but also provoking an increase in their supply. A significant expansion of the sectoral supply, while market demand remains unchanged, can lead to such a fall in the price of the industry product, which will not only deprive the leader of profits, but also the very ability to conduct economic activities due to high fixed costs. It is no coincidence that this behavior of the leading firm is called "suicidal." Therefore, the leading firm, regardless of its advantages, is more likely to be satisfied with a small stable profit and will adjust the price level in such a way as to maintain entry barriers at a high level, that is, to carry out a “penetration-limiting” pricing strategy. The competitive strategy of a price leader is to focus on long-term profits by aggressively responding to competitors' challenges in terms of both price and market share. On the contrary, the competitive strategy of firms occupying a subordinate position consists in avoiding direct confrontation with the leader, using measures (most often of an innovative nature) to which the leader will not be able to respond. Often, the dominant firm does not have the ability to impose its price on competitors. But in this case, too, it remains a kind of conductor of pricing policy (announces new prices), and then they talk about barometric price leadership. If we evaluate the market model with price leadership from the point of view of economic efficiency, then the result will entirely depend on what is the source of leadership in this market. When cost advantages are the source of dominance, price leadership will provide a more efficient outcome than would have been achieved by perfect competition. When price leadership is based on cost advantage, it achieves market equilibrium when industry supply is greater than that of competition. But when price leadership is based solely on market control (the firm has a significant share of the industry's supply), the outcome of a market with a price leader will be worse than it would have been under perfect competition. The peculiarity of oligopolistic interaction lies in the fact that firms tend to maintain the established statusquo in the industry, in every possible way counteracting its violation, since it is the current equilibrium in the industry that provides them with the most favorable conditions for making a profit. In this regard, the greatest threat to oligopolistically interacting firms is the penetration of “newcomers” into the industry market. There are several reasons for this. First, the entry of a new firm into the market upsets the existing equilibrium, which will inevitably intensify competition among all participants. Secondly, the “newcomers” are not burdened with obligations regarding the oligopolistic agreement that has developed in the industry market. Third, they may not at all share the strategy worked out by the "old" firms, but, on the contrary, behave aggressively. Finally, “newcomers” can bring with them better technology and better products, which will significantly weaken the competitive position of firms operating in the market. Therefore, one of the most important concerns of participants in oligopolistic interaction is the creation of conditions that reduce the likelihood of new firms entering the market, in relation to which sectoral barriers play a primary role. Industry barriers to entry can be raised in a number of ways. But the most affordable, and most importantly, the most effective is the price. If the barriers to entry are low, then firms in the industry can artificially raise them by lowering the market price. For example, implementing a cooperative strategy, firms in the industry could secure economic profit (shaded box) by producing Qi of output at a price of P 3. However, the availability of economic profit would be an attractive factor for new firms to enter the industry. If the outsider's costs are described as LRAC A, then at a price of P 3 his entry becomes inevitable, since such a price carries a profit potential for the entering the market. Knowing the level of industry demand (D) and costs (LRAC 0), as well as assessing the level of the applicant's entry costs, firms operating in the industry can set the market price at the level of the minimum long-run average outsider costs, that is, P 2. In this case, the oligopolists will lose part of the profit (horizontally shaded rectangle) - although they will compensate for some part of the losses equal to the area of the vertically shaded rectangle by increasing their supply to Q 2. But firms can expand their supply up to Q 3 by setting the price of the product at the level P l corresponding to their minimum average long-term production costs. Such an agreed decision would deprive firms of economic profits (sectoral economic profits are zero). But at the same time, it will make the penetration of "outsiders" into the industry impossible. Moreover, not only due to the unprofitableness of production for an outsider (P 3 It is clear that the decision to choose a price level that blocks entry will depend on two circumstances - the level of the oligopolists' own costs and the costly potential of “outsiders”. If the costs of the latter are higher than the industry average, then the sectoral price will be set at a level higher than the minimum production costs of firms operating in the market, but lower than the minimum costs with which firms that threaten to enter the market can produce. Even if the price is set at the level of the minimum average long-term costs, the firms operating in the industry will still receive accounting profits. More often than not, firms prefer the sustainability of profit to its rate, which means that their decisions will tend to set prices at a level that is guaranteed to prevent other firms from entering the market. 2.2
Noncooperative Behavior Models: The Price War and competitive cooperation - Response-based engagement Implementing cooperative strategies in practice is difficult, if not impossible. This is due both to fears of being sanctioned by the state (heavy fines and long prison terms) for violating antimonopoly legislation, and to the specifics of the state of the industry market. Therefore, the presence of competitive rivalry in oligopolistic markets is a fairly frequent occurrence. However, even in this case, that is, in the absence of cooperative behavior, the nature of competitive interaction under oligopoly conditions has its own characteristics. Their essence is that each company builds its own competitive strategy, taking into account the one implemented by its competitors. In other words, the firm's competitive behavior becomes a form of response to decisions of other firms operating in the industry market. In this regard, it is extremely important to choose a parameter that is accepted by firms as an object of response, that is, that strategic variable that is accepted by firms as an initial premise when making a decision and in this sense plays the role of an anchor in maintaining market equilibrium. Typically, this parameter is the price or volume of production. When this role is played by the price, there will be a price oligopoly, and when the volume of output - a quantitative oligopoly. Since interaction based on response is an extremely difficult process for formalized analysis, we will somewhat simplify the problem by adopting a duopoly as a model of an oligopolistic market, that is, an industry market in which two firms operate. The Cournot model assumes that there are only two firms in the market, and each firm takes the competitor's price and output unchanged, and then makes its own decision. Each of the two sellers assumes that their competitor will always keep their output stable. The model assumes that salespeople are not aware of their mistakes. In fact, these assumptions by sellers about the competitor's reaction will obviously change when they learn of their previous mistakes. Let us assume that there are two firms on the market: X and Y. How will firm X determine the price and volume of production? In addition to costs, they depend on demand, and demand, in turn, on how much production will be produced by firm Y. However, what firm Y will do, firm X does not know, it can only assume possible options for its actions and accordingly plan its own output. Since market demand is a given value, the expansion of production by the firm will cause a decrease in demand for the products of firm X. Figure 1.1 shows how the schedule of demand for the products of firm X will shift (it will shift to the left) if firm Y begins to expand sales. The price and volume of production set by firm X based on the equality of marginal income and marginal costs will decrease, respectively, from P0 to P1, P2 and from Q0 to Q1, Q2. Fig 1.1 Cournot model. Change in price and volume of production firm X when expanding production by firm Y: D - demand; MR is the marginal income; MC - marginal cost If we consider the situation from the position of firm Y, then we can draw a similar graph, reflecting the change in the price and quantity of products produced by it, depending on the actions taken by firm X. Combining both graphs, we get the curves of the reaction of both firms to the behavior of each other. In fig. 1.2 curve X reflects the reaction of the company of the same name to changes in the production of firm Y, and curve Y, respectively, vice versa. Equilibrium occurs at the intersection of the response curves of both firms. At this point, the assumptions of the firms coincide with their actual actions. Rice. 1.2 - Curves of the reaction of firms X and Y on the behavior of each other The Cournot model does not reflect one significant circumstance. Competitors are expected to react to a firm's price change in a certain way. When firm Y enters the market and takes away part of consumer demand from firm Y, the latter “gives up”, enters the price game, reducing prices and production. However, firm X can take an active position and, by significantly lowering the price, prevent firm Y from entering the market. Such actions of the firm are not covered by the Cournot model. The Cournot model was considered naive by many economists for the following reasons. The model assumes that duopolists do not infer from the fallacy of their assumptions about competitors' reactions. The model is closed, that is, the number of firms is limited and does not change in the process of moving towards equilibrium. The model says nothing about the possible duration of this movement. Finally, the assumption of zero transaction costs is unrealistic. Equilibrium in the Cournot model can be depicted in terms of response curves showing the profit-maximizing volumes of output that will be produced by one firm given the output of a competitor. Response curve I represents the profit-maximizing output of the first firm as a function of the output of the second. Response curve II represents the second firm's profit-maximizing output as a function of the first firm's output. Response curves can be used to show how equilibrium is established. If you follow the arrows drawn from one curve to another, starting with the release q1 = 12,000, then this will lead to the implementation of Cournot equilibrium at point E, at which each firm produces 8,000 products. At point E, two response curves intersect. This is the Cournot equilibrium. Bertrand's duopolists are in every way similar to Cournot's duopolists, only their behavior is different. Bertrand's duopolists proceed from the assumption that prices set by each other are independent of their own price decisions. In other words, not the release of a rival, but the price assigned by him, is a parameter for the duopolist, a constant. In order to better understand the difference between the Bertrand model and the Cournot model, we also present it in terms of isoprofit and response curves. Due to the change in the controlled variable (from output to price), both isoprofits and response curves are plotted in the two-dimensional space of prices, not outputs. Their economic meaning is also changing. Here, the isoprofit, or the curve of equal profit, of duopolist 1 is the set of points in the price space (P 1, P 2) corresponding to combinations of prices P 1 and P 2, providing this duopolist with the same amount of profit. Accordingly, the isoprofit of duopolist 2 is a set of points in the same price space corresponding to combinations (ratios) of prices Z 1 and P 2, providing the same profit to duopolist 2. Thus, for any change in the price of duopolist 2, there is a single price for duopolist 1 that maximizes his profit. This profit-maximizing price is determined by the lowest point of the highest isoprofit of duopolist 1. Such points shift to the right as they move to higher isoprofits. This means that, by increasing his profit, duopolist 1 does this by attracting buyers of duopolist 2, who increases his price, even if duopolist 1 also increases the price. By connecting the lowest-lying points of all sequentially located isoprofits, we obtain the response curve of duopolist 1 to price changes by duopolist 2 ≈ R 1 (P 2). The abscissas of the points on this curve represent the profits that maximize the prices of duopolist 1 at the prices of duopolist 2 given by the ordinates of these points. Now, knowing the response curves of the Bertrand duopolists, we can define the Bertrand equilibrium as a different (compared to the Cournot equilibrium) special case of the Nash equilibrium, when the strategy of each enterprise consists not in choosing its own volume of output, as in the case of the Cournot equilibrium, but in choosing the price level at which he intends to sell his release. Graphically, the Bertrand ≈ Nash equilibrium, like the Cournot ≈ Nash equilibrium, is determined by the intersection of the response curves of both duopolists, not in the output space (as in the Cournot model), but in the price space. A Bertrand equilibrium is achieved if the duopolists' assumptions about each other's price behavior come true. If duopolist 1 believes that his rival will set the price P 1 2, he will choose the price P 1 1 in order to maximize profit, according to his response curve. But in this case, duopolist 2 may actually set a price P 2 2 on his product based on his response curve. If we assume (as we did when considering the Cournot equilibrium) that the response curve of duopolist 1 is steeper than the corresponding curve of duopolist 2, then this iterative process will lead duopolists to the Bertrand ≈ Nash equilibrium, where their response curves intersect. The route of their convergence to the point B≈N will be similar to the route of convergence of the Cournot duopolists' issues. Since the products of both duopolists are homogeneous, each of them will prefer the same level of its price in a state of equilibrium. Otherwise, the duopolist who charged the lower price would take over the entire market. Therefore, the Bertrand-Nash equilibrium is characterized by a single price belonging to a ray in a two-dimensional space of prices, emanating from the origin at an angle of 45. In addition, in the Bertrand-Nash equilibrium state, the equilibrium price will be equal to the marginal cost of each of the duopolists. Otherwise, the duopolists, guided by each desire to conquer the entire market, will lower their prices, and their desire can be paralyzed only when they equalize their prices not only among themselves, but also at marginal costs. Naturally, in this case, the total industry profit will be zero. Thus, despite the exceptionally small number of sellers (there are only two of them in a duopoly), Bertrand's model predicts, in fact, a completely competitive equilibrium of an industry that has a duopoly structure. Let, as in the Cournot model, market demand is represented by a linear function P = a - bQ, where Q = q 1 + q 2. Then the inverse demand function will be Q = q 1 + q 2 = (a / b) √ (1 / b) P. If for a given price of duopolist 1, P 1> MC, duopolist 2 sets the price Z 2> MC, the residual demand of duopolist 1 will depend on the ratio of prices P 1 and P 2. Namely, for P 1> P 2, q 1 = 0, all buyers attracted by a lower price will go to duopolist 2. On the contrary, for P 1< P 2
весь рыночный спрос окажется захваченным дуополистом 1. Наконец, в случае равенства цен обоих дуополистов, P 1
= P 2
, рыночный спрос окажется поделенным между ними поровну и составит (а/b - 1/b P)0,5 для каждого. The demand function of duopolist 1 is displayed as having a gap (AB) on the demand curve DP 2 ABD ". If duopolist 2 sets the price P 2, then the demand for the products of duopolist 1 will be zero, which corresponds to the vertical segment (DP 2) of its demand curve. When P 1 = P 2 the market will be divided equally (segment P 2 A will belong to duopolist 1 and segment AB to duopolist 2.) Finally, if duopolist 1 responds to P 2 by lowering his price below this level, he will capture the entire market (segment BD "). Each of the enterprises - duopolists can remain profitable, gradually reducing the price in order to increase its share of market demand until the equality P 1 = P 2 = MC is reached, which characterizes the Bertrand-Nash equilibrium state. Thus, unlike Cournot's model, which predicts the achievement of a completely competitive result only as the number of oligopolists increases, namely, when n / (n + 1) approaches one, Bertrand's model predicts a completely competitive result immediately upon the transition from the monopoly of one seller to duopoly. The reason for this dramatic difference in conclusions is that every Cournot duopolist faces a downward residual demand curve, while Bertrand's duopolists have a perfectly elastic rival demand curve, so that price reductions are profitable as long as they remain above marginal costs. After studying the Cournot and Bertrand models, which predict significantly different outcomes for n = 2, you will naturally have a question, whose model is "better", "more correct", in a word, which one should be used in the analysis of oligopoly. Before trying to answer it, let's think about this. Not only are the Cournot and Bertrand duopolists “naive” and unable to correct their behavior under the influence of experience or, as they often say, are incapable of “learning by doing”, they are endowed with another, convenient for building a model, but very unrealistic, property - their manufacturing facilities are literally "dimensionless" and are capable of contracting and expanding like rubber. After all, duopolists can, without incurring any additional costs, freely vary the volume of their output from zero to a value equal to the entire market demand. At the same time, their marginal and average costs remain unchanged, and there is no economics or noneconomics of scale. F. Edgeworth proposed to introduce power limitation into the Bertrand model. A vivid illustration of the mechanism of price competition in oligopoly conditions is the broken demand curve model, also known as the Swisi model, named after the American economist P.M. Sweezy (1910-2004). The model of a broken demand curve is based on the assumption about the peculiarities of response in conditions of oligopolistic interaction. The essence of the assumption is that competitors will always react to a decrease in the price by a firm, responding with an adequate decrease in the price of their product, but they will not respond to an increase in the price, leaving their prices unchanged. Moreover, a certain degree of differentiation of the product of firms is allowed, which, however, does not prevent a high elasticity of substitution of products of different firms. Rice. 2.1 Curved demand curve model: D1, MR1 - demand curves and the marginal income of the firm at prices above P0; D2 MR2- curves of demand and marginal income of the firm at prices below P0 Since the considered principle applies to all firms operating in the sectoral market, the sectoral demand curve will have the same form. The peculiarity of the demand curve is that it has an inflection point E, which is the point of the equilibrium market price, which, in turn, determines the optimal output of individual firms. However, as we already know, in the case of a broken demand curve, the marginal revenue line also becomes a broken line MR d. The main feature is that the ST gap appears at the marginal revenue line, which sharply differs from the marginal revenue curves for perfect and monopolistic competition, as well as monopoly. This gap will be the larger, the fewer firms operate in the market, the more similar in production capacity they are, the more standardized their product and the closer the interaction between them. If firms are guided in their behavior by profit maximization (MR = MC), then even if the marginal production costs change in the range ST, for example, when they increase from MC X to MC 2, the firm will not change the volume of output q *. Fearing an increase in price due to the threat of a decrease in market share, as well as its decrease due to the reaction of competitors, the firm will prefer to keep the price at the level of the established equilibrium market price P *. Simply put, expecting a completely certain type of response to its actions, each of the firms will not seek to use the price as a means to gain a competitive advantage, preferring to maintain it unchanged even in the event of an increase in production costs. Oligopolistic interaction encourages firms to maintain market price stability. In conclusion, we can fix a number of features of the functioning of the oligopolistic market. First, its participants will refrain from unmotivated price changes. Second, sell at the same or comparable prices. Third, in conditions of oligopoly, there are factors that determine the stability (rigidity) of market prices. 2.3 Comparative characteristics of models Of course, price stability is an important condition for generating economic profits and, undoubtedly, meets the interests of oligopolists. Nevertheless, the practice does not confirm such unambiguity. This is connected, apparently, with the fact that competing firms do not always regard the price reduction as an encroachment on their market shares. Therefore, their response is not as unambiguous as it is assumed in the model. In addition, when faced with similar problems (lower demand, higher costs), firms can follow the initiative of the first mover. The weakness of the model lies in the fact that, explaining the stability of prices, it does not reveal the mechanism of the formation of the initial equilibrium, that is, it does not say anything about how the market moves to the inflection point. The choice of a model for the interaction of firms in the sectoral market depends on many factors. Primarily from those that have a decisive influence on the competitive environment. Nevertheless, it is possible to give a certain typology of the choice of a model of behavior by firms. Experimental modeling has shown that, firstly, the choice of a model for the behavior of firms depends on their number. Under the conditions of a duopoly, collusion becomes almost inevitable. Interaction in a model with a limited number of participants most often ends up with results close to the Cournot equilibrium. Secondly, the criterion used by the owner to reward the heads of firms has an essential role in the choice of a model of behavior. When the contractual relationship provides for the use of penalties by the owner for increasing the volume of sales, a model of interaction between firms will be formed that is as different as possible from the Bertrand model, and the volumes of sales will be selected taking into account the maintenance of a given price and profit. If, on the other hand, sales are taken as a criterion for evaluating work and rewarding senior management, then firms will tend to the Bertrand model of interaction. Moreover, such a model of interaction will involve even those firms where the incentive system is built on the basis of other criteria. Quantitative models of oligopoly (Cournot, cartel) will dominate those sectoral markets where there are production constraints. In capital-intensive industries that require large investments and time to change production capacities, it is difficult to vary the volume of output. Therefore, in manufacturing industries, firms will prefer to compete on price rather than volume. Price oligopoly (Bertrand model, price leadership) is more likely to be present where there are barriers to price adjustment. In the case of consumer goods, price change is not as simple a matter as it might seem. The conclusion of long-term supply contracts, fixing prices in the eyes of consumers (catalogs, price lists) impose serious restrictions on pricing, and the response of firms is more likely to be expressed in adjusting volumes. We can say that for industries with a long production cycle, price adjustments will be characteristic, while for industries with a short production cycle, an output adjustment will be typical. If we evaluate the models of oligopolistic interaction by their effectiveness, then with a certain degree of convention it can be argued that the cartel will be the least effective among them, and the most effective will be interaction in the Bertrand model. In our course work, we tried to consider the theoretical features of the functioning of such a market structure as an oligopoly. An oligopoly is a situation where there are few firms in the market that control most of the market. Especially oligopoly, we examined its main features in the first chapter of our work. The main features of an oligopoly include: a small number of firms, barriers to market entry, price control, non-price competition, interdependence of producers. In the economic literature, there are many criteria by which oligopolies are classified. For example, by the nature of the products they produce, they distinguish between homogeneous and differentiated oligopolies. Oligopolies are interdependent. The interrelation of the subjects of the oligopoly is especially clearly manifested in the pricing policy. If one of the firms lowers the price, others will immediately react to such an action, otherwise they will lose buyers in the market. Interdependence in actions is a universal property of oligopoly. Oligopolistic firms mainly use non-price competition methods. There is evidence that in many oligopolistic industries prices have remained stable for a long period of time. Firms operating within the oligopolistic structure of the market seek to create a network of connections that would coordinate behavior in the common interest. One form of this coordination is the so-called price leadership. It consists in the fact that changes in reference prices are explained by a certain firm, which is recognized as the leader by all others who follow it in the pricing policy. There are three types of price leadership: dominant firm leadership, leadership conspiracy, and barometric leadership. Leadership of the dominant firm is a situation in the market when one firm controls at least 50% of production, and the rest of the firms are too small to influence prices through individual pricing decisions. Leadership collusion involves the collective leadership of several of the largest firms in the industry, taking into account the interests of each other. Price leaders must then decide whether to announce price changes that are beneficial only to them, or set a price level that will soften the contradictions between all firms operating in the industry. Barometric price leadership, in contrast to the previous type of price leadership, is a more amorphous and uncertain structure; it often fails to achieve high price levels. There is often a change of leader. He is not always followed due to the lack of the ability to force the rest of the participants to joint actions. They announce reference prices, but actual prices charged by other firms differ from those quoted. The theory of oligopolistic pricing shows why firms avoid price competition when competing for markets. By raising the price, the manufacturer loses part of the market in favor of the rival; by reducing the price, it evokes counter-actions and again gains nothing. Therefore, the oligopolist applies methods that rivals cannot quickly and completely reproduce. A firm's market share is largely determined by non-price competition. This involves improving the quality of goods, differentiating them, using advertising, improving after-sales service, and providing loans. The competition model is becoming more complex and its methods are becoming more diversified. In summary, despite some of the disadvantages of oligopoly, such as the use of market power to restrict competition and increase prices, oligopoly has many advantages and is one of the most common market structures in modern economies. BIBLIOGRAPHY 1. Bakanov, MI, Shemet, AD Theory of economic analysis. - M .: PrintInvest, 2007 2. Borisov, EF Economic theory. - SPB .: PiterPress, 2008 3. Voitov, A. G. Economy. General course. - M .: Eksmo, 2009 4. Volkonsky V.A., Koryagina T.I. On the role of oligopoly in the modern economy // Banking. - 2009 5. Dusushe OM Static Cournot - Nash Equilibrium and Reflexive Games of Oligopoly // Economic Journal of the Higher School of Economics. - 2008. - No. 1. - P. 5. 6. The course of economic theory / Under total. ed. M. N. Chepurina, E. A. Kiseleva. - M .: RUDN, 2008 7. Koterova N. P. Microeconomics: Textbook. manual.- M .: ACADEMIA, 2009 8. Levina E.A. Microeconomics: tasks and solutions. 3rd ed. - M .: GU HSE, 2009 9. Microeconomics. Theory and Russian practice. 8th ed., Erased. // Ed. Gryaznova A.G., Yudanova A.Yu. - M .: KnoRus, 2010 10. Microeconomics. Ivashkovsky S.N. - 3rd ed., Rev. - M .: Delo, 2002. - P. 270. 11. Microeconomics. Maksimova V.F. - M .: EAOI, 2009. - S. 114-115. 12. Microeconomics. Tarasevich L.S., Grebennikov P.I., Leussky A.I. - 4th ed., Rev. and additional - M .: Yurayt-Izdat, 2006. - P. 149. 13. Novikova I.V. Microeconomics. Textbook for universities - M .: Tetrasystems, 2010 14. Taranukha, Yu.V. Microeconomics: textbook / Yu.V. Taranuha; under total. ed. prof. A.V. Sidorovich. - M .: "Business and Service", 2009 15. "Mergers, acquisitions and restructuring of companies" Gohan P. - M: Publishing house Alpina Business Books - 2007 16. Polotnitsky, M. I. Course of microeconomics. M .: PrintM, 2009 17. Salimzhanov, IK Pricing. - Minsk: BelPt, 2008 18. Pindike, R., Rebinfeld, D. Microeconomics. Minsk: BSEU, 2009 19. "Economic Theory" - 4th edition by A.I. Popov - SPb: Publishing house PETER, 2009 20. Hayman, DN Modern microeconomics: analysis and application. - M .: Moscow State University, 2008 ". Another definition of an oligopolistic market can be the value of the Herfindahl index exceeding 2000. An oligopoly with two participants is called a duopoly. When a small number of firms are on the market, they are called oligopolies. In some cases, the largest firms in the industry may be referred to as oligopolies. The products that the oligopoly supplies to the market are identical to those of competitors (for example, mobile communications), or have differentiation (for example, washing powders). At the same time, price competition is very rare on oligopoly markets. Firms see opportunities for making a profit in the development of non-price competition. As a rule, it is very difficult for new firms to enter the oligopoly market. The barriers are either legal restrictions or the need for large initial capital. Therefore, big business is an example of an oligopoly. Of particular importance for the functioning of oligopolies is their awareness of the market. Given the ability of competitors to expand production, each firm fears rash actions that reduce its market share. Therefore, awareness is one of the prerequisites for existence. The behavior of each firm in the market has a clearly substantiated logic of actions and therefore is called strategic. Strategies can be adjusted over time, but such changes are of a medium or long term nature. The strategies of behavior of oligopolies are divided into 2 groups. The first group provides for the coordination of actions by firms with competitors (cooperative strategy), the second - lack of coordination (non-cooperative strategy). The best strategy for an oligopoly is collusion with competitors over production prices and production volumes. Collusion makes it possible to strengthen the power of each of the firms and use the opportunity to obtain economic profit in such an amount in which it would receive a monopoly if the market were monopoly. Such a conspiracy is called a cartel in the economy. In the antitrust laws of most countries, collusion is prohibited, therefore, in practice, cartels are either international (OPEC cartel) or secret in nature. The peculiarity of the existence of cartels is their fragility: the members of the cartel are always tempted to get a higher income in the short term, breaking the agreement, and when this happens, the cartel disintegrates. As a rule, among the totality of firms, one stands out, which becomes the market leader. This is due, for example, to the duration of existence (authority), the presence of more professional personnel, the presence of scientific departments and the latest technologies, their higher share in the market. The leader is the first to make changes in terms of price or output. At the same time, the rest of the firms repeat the actions of the leader. As a result, there is a consistency of common actions. The leader should be most informed about the dynamics of demand for products in the industry, as well as about the opportunities of competitors. The behavior of firms is based on the comparison of self-forecasting market changes. Each company calculates the actions of competitors and chooses such a production volume and price that stabilizes its position in the market. If the initial calculations are wrong, the firm adjusts the selected parameters. After a certain period of time, the shares of each company in the market stabilize and do not change in the future. It is assumed that each firm wants to get even bigger and ideally take over the entire market. In order to force competitors to leave, one of the firms begins to reduce the price. The rest of the firms, in order not to lose their share, are forced to do the same. The price war continues until one firm remains on the market. The rest are closed. Since there are a small number of firms in the market, sellers need to develop development strategies for their firm so that they are not forced out of the market by competitors. Since there are few firms on the market, companies closely monitor the actions of competitors, including their pricing policy, with whom they cooperate, etc. The pricing policy of an oligopolistic company plays a huge role in its life. As a rule, it is not profitable for a firm to raise prices for its goods and services, since there is a high probability that other firms will not follow the first, and consumers will "go" to the rival company. If the company lowers the prices of its products, then, in order not to lose customers, competitors usually follow the company that lowered the prices, also lowering the prices of the goods they offer: a “race for the leader” takes place. Thus, so-called price wars often occur between oligopolists, in which firms set a price for their products that is no higher than that of a competitor-leader. Price wars are often fatal for companies, especially those competing with more powerful and larger firms. A feature of the oligopoly is their high excess capacities, which, if necessary, make it possible to significantly increase the volume of production. Therefore, before changing prices and tariffs, each firm should analyze the possible actions of competitors. In oligopolistic markets, price stability is most often observed. It can be explained using a broken demand curve model. Suppose the original price is P1, the quantity is Q1. If the firm decides to lower the price and increase the demand for the product, then the competing firm will do the same in order not to lose its market share. Therefore, the increase in demand will be small, and the demand itself will be characterized by low elasticity. If the firm starts to increase the price, then competitors will not change their price, hoping thereby to get additional buyers. As a result, when the price rises, the firm will face a large reduction in demand. This suggests that it will be elastic. Combining 2 graphs of demand, we obtain its uniform dynamics (graph is a broken curve of demand). In order to determine the behavior of the firm with such a demand, it is necessary to compare the MR and MC of the firm. The single MR schedule will be in 2 parts with a vertical gap between them. The presence of this gap allows us to conclude that an increase in costs from MC1 to MC2 will not lead to changes in production and prices. Thus, an oligopoly is a structure that very rarely changes the price of its products and the volume of its production. Change occurs only in the event of significant shocks: a sharp rise in resource prices, a significant increase in taxes. Some oligopolists act according to the principle "do not have a hundred rubles, but have a hundred friends." Thus, firms enter into collaborations with competitors such as alliances, mergers, collusion, cartels. For example, the air transportation oligopolist Aeroflot entered the Sky Team alliance with other world airlines in 2006, the oil-producing countries united in OPEC, often recognized as a cartel. An example of a merger of two companies is the merger of Air France and KLM. By joining together, firms become more powerful in the marketplace, which allows them to increase output, change the prices of their goods more freely, and maximize their profits. Game theory is a theory of the behavior of subjects in conditions where the decisions of one of them influence the decisions of all the others. It is used to analyze the actions of both individuals and firms. The models of oligopoly worked out in the economic literature do not always take into account the circumstances of the formation of oligopoly markets and the influence of various changes on them. Game theory is a universal tool for describing the behavior of oligopoly. Its essence lies in identifying options for action, the possible consequences of a sequence of actions, and then conducting an analysis to find the best option for each of the parties. The process of this analysis is called play. The main drawback of game theory is the large dependence of the result obtained on the model of the awareness of subjects, the real awareness of which may remain unknown. Oligopoly has advantages and disadvantages that affect efficiency. Positive features include: Negative traits include: Market power- the possibility of setting and regulating prices in the market. Sources of market power: Several indicators are used to determine market power: The use of one or several coefficients allows us to conclude that the market is monopolized, but this oligopoly or monopoly does not give an exact answer. Therefore, as a rule, they use additional information. ⚡ Oligopoly ⚡- the form of the market, when several enterprises producing similar products operate. Another definition of an oligopolistic market can be the value of the Herfindahl index exceeding 2000. An oligopoly of two participants is called a duopoly. Examples of oligopolies are passenger aircraft manufacturers such as Boeing or Airbus, car manufacturers such as Mercedes, BMW. In the Republic of Belarus there are 4 sugar factories, 3 chemical fiber factories. Homogeneous products - products that do not differ in a variety of types, grades, sizes, brands (alcohol - 3 grades, sugar - about 8 grades, aluminum - about 9 grades). Heterogeneous products - products that differ in a wide variety of types, grades, sizes, brands. Example: in the Republic of Belarus, the market of ceramic tiles is dominated by JSC "Kiramine" producing over 75% of these products. Example: in Belarus there are two factories producing televisions - Vityaz and Gorizont, they act in everything imitating each other. The term "oligopoly" comes from Greek words - oligos (several) and poleo (sell). Principled due to the small number of firms on the market are their special relationship, manifested in close interdependence and intense rivalry between. In contrast to or pure monopoly under oligopoly, the activity of any of the firms evokes an obligatory response from competitors. This interdependence of actions and behavior of few firms is a key characteristic of oligopoly and applies to all areas of competition: price, sales volume, market share, investment and innovation, sales promotion strategy, after-sales services, etc. We have already mentioned coefficient of volumetric, or quantitative, cross elasticity of demand, which serves to quantify the interdependence of firms in the market. This coefficient shows the degree of quantitative change in the price of firm X with a change in the volume of output of the firm Y on 1%
. If the volumetric cross-elasticity of demand is equal to or close to zero (as is the case with perfect competition and pure monopoly), then the individual producer can ignore the reaction of competitors to his actions. Conversely, the higher the coefficient of elasticity, the closer the interdependence between firms in the market. With oligopoly Eq> 0 however, the exact value depends on the specifics of the industry in question and specific market conditions. The type of product produced by the oligopoly can be either homogeneous or diversified. The degree of influence of the firm on market prices, or its monopoly power, is high, although not to the same extent as under pure monopoly. Bargaining power is determined relative excess of the market price of the firm and its marginal costs(with perfect competition P = MC), or L = (P-MC) / P. The quantitative value of this coefficient (Lerner coefficient) for the oligopolistic market is greater than in the case of perfect and monopolistic competition, but less than in the case of pure monopoly, i.e. fluctuates within 0 Entry to the market for new firms is difficult, but possible. When considering this characteristic, it is necessary to distinguish between the already established, slow-growing markets and young, fast-growing markets. Oligopoly is market structure or model in which there are few sellers in the market for homogeneous or differentiated products. It is important to note that only a structure that has more than two sellers can be considered a pure oligopoly. In simple words, Oligopoly is a situation when in the market for certain goods or services there are a small number of large firms that occupy a large part of the market share. Most often, oligopolies can be observed in financially costly and technological areas, such as metallurgy, oil and gas industries, railways, shipbuilding, aircraft construction, and high-tech industries. Speaking about oligopoly, it should be noted a certain connection with the more common known term -. In fact, these are quite similar concepts, although they have some differences. It should be noted that quite often the term "oligopoly" is also applied to models of duopoly, since in fact, duopoly is a special case of oligopoly. There are many examples of oligopolies in the modern world, and many of them are familiar to almost everyone. So, for example, in the markets of certain countries there are a small number of oil companies. This can be seen in the markets for the production of cement, steel, pesticides, and so on. If we turn to the automotive market in a certain region, for example, in Germany, it can be noted that the main market share there is occupied by the Daimler AG concerns ( Mercedes-Benz), BMW AG and Volkswagen AG. An excellent example of a duopoly is the manufacturers of microprocessors for desktops and laptops, namely Intel and AMD. In fact, it is these two manufacturers who share the entire processor market. Oligopolies often emerge naturally as companies grow and begin to capture more and more market share, gradually displacing or absorbing competitors. Over time, the number of companies offering specific products and services begins to dwindle to a few large corporations. Customers, in turn, when choosing products, tend to trust more eminent and reputable brands. In an oligopoly formed, the dominant companies feel fairly free and can afford to have complete control over pricing. So, for example, many mobile phone companies significantly inflate the price of their products just because they are popular and can afford it. Another factor in the influence of dominant companies on the market as a whole is the relationship with competitors. So, for example, when a company lowers prices or offers new services or products, competitors should follow suit. Otherwise, if they don't provide customers with an alternative, they may end up losing those customers altogether. If we talk about the positive and negative aspects of oligopoly as a structure, then it should be noted that there are both significant advantages and disadvantages. The pluses include the fact that large companies compete quite strongly with each other, which stimulates the growth of product quality and scientific and technological progress in general. Nevertheless, such competition, combined with the enormous capabilities of large firms, can significantly limit the emergence of new players in a particular market for goods or services.
Conclusion
Main features
A typology of oligopoly models
Cartel model
Leadership model by price (volume)
Cournot model
Bertrand model (price war model)
Universal interdependence
Price policy
The problem of price stability in an oligopoly
Cooperation with other firms
Using game theory
Oligopoly and efficiency
Market Power: Its Sources and Indicators
Types of oligopolies
Examples are cars, cigarettes, soft drinks, steel (about 140 brands).Characteristic features of the functioning of oligopolies
Product uniformity or differentiation
Impact on market prices
Barriers
29Mar
What is Oligopoly
What is OLIGOPOLIA - definition in simple words.
Oligopoly examples.
The oligopoly market. Conditions for the emergence of oligopoly.
