Using examples where appropriate, explain why

Using illustrations where appropriate, explain why it is good for houses to be witting of their oligopolistic mutuality and to advance conniving action

An oligopoly is a market where there are few Sellerss, and there are some big plenty that if they vary their production ( outputs ) , the industry’s monetary value will be affected and each of the Sellerss will be affected every bit good. In an oligopoly there may be smaller houses, which have to follow what the larger houses do. ( Baumol and Blinder, 2004 ) . As monetary value is an of import factor in all oligopolistic markets, the participants are ever seeking to foretell their rivals behaviours to understate its consequence on them.

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In order for an oligopolist to increase the measure they can sell, they can make one of two things: cut down monetary values or switch the demand curve outwards, as can be seen in the undermentioned diagram:

Assuming that at any given point, the measure sold is Q0 merchandising at a monetary value of P0, a big house in the oligopoly can increase its end product by cut downing monetary value from P0 to P1, traveling downwards along the demand curve to a new measure Q1. However, there is the job of oligopolistic mutuality: an action from one of the market participants consequences in antiphonal actions from the other participants in the market. ( Murphy and Ng, 1974 ) This means that when monetary value is reduced to P1, this will besides promote the remainder of the participants in the market to cut down their monetary values every bit good since they will non desire to lose market portion. Therefore, the measure increased may non be every bit big as predicted if positive at all, and net incomes will cut down since the monetary value has gone down. Small by small, economic theory suggests that all of the market participants make accommodations to monetary value until they reach a point where they are all maximizing their joint net incomes, which turns out to be the same degree as the 1 that would be charged by a monopoly. ( Competition Commission South Africa, 2007 )

On the other manus, a house can besides increase end product by making larger demand for the merchandise, via advertisement, merchandise distinction or advancing barriers to entry, amongst other mechanisms. This would do an outward displacement in the demand curve, traveling it from D to D’ . Here, monetary value has stayed the same at P0 but the measure sold has increased to Q2. Since demand for the merchandise has grown, all of the market participants should be benefited by this attack. However, when disbursement in advertisement, as stated by Murphy and Ng ( 1974 ) , in order to maximize net incomes for the whole industry, the participants must each hold a maximal they can pass ( this would be a signifier of collusion, an informal understanding to pass “x” ) . In a “collusive oligopoly” , these Sellerss agree on the monetary value and end product that each will bring forth ( Competition Commission South Africa, 2007 ) . This collusion is normally common in industries where there are a larger figure of participants with smaller market portions where it is more hard to continue agreed-upon monetary values. If one of the houses decided to travel against the colluded advertisement ceiling, increased advertisement might better their net incomes, but at everyone else’s disbursal. This would so intend that the staying participants would either hold to increase their ain disbursement to do certain they kept their market portion or collude in another manner, excepting the “dissident” house that breached the advertisement ceiling. In the terminal, traveling above this disbursement to increase the market demand may or may non increase an single firm’s net income.

From the illustrations above, we have seen that oligopolistic mutuality forces oligopolies to hold more changeless monetary values and compete via non-price competition, since a alteration in monetary value up or down will ensue in the other participants making likewise to fit the first house and keep their market portion. However, in existent life we find illustrations where thanks to collusive action, oligopolies can increase monetary values efficaciously for their net income maximization. Such is the instance of OPEC, the Organisation of Petroleum Exporting Countries, which give themselves quotas of oil to be produced and charge monetary values that the administration as a whole agrees upon. This has allowed the recent rise in oil monetary values per barrel at over US $ 50/barrel. When moving together, OPEC can increase the monetary value of oil and maximize each of the oil bring forthing countries’ net incomes – some argue to fund wars, others argue it is to beef up their economic systems. Whichever the instance, this industry is wholly cognizant that what each of them produces straight affects the remainder and therefore they must stay colluded in order remain within the group and maximize the industry’s net incomes in order to maximize their ain net incomes.

We have seen that in an oligopolistic market, an action by one house to increase its net incomes triggers reactions from the staying few houses ( oligopolistic mutuality ) so as to countervail any possible addition the first house may hold obtained. In order to antagonize this, houses within an oligopoly must advance conniving action—determining together the monetary value or measure to be sold – so that they can maximize the net incomes of the industry as a whole and so take a portion of that. It is of import to observe that both formal and nonformal collusion is regulated in many topographic points and houses must adhere to these ordinances. However, there are certain established colluded industries, such as OPEC, which have come to be accepted. This may come into argument in the hereafter, from the consumers point of position, if the costs are seen to be excessively high as is the cost of oil.


Baumol, W. and Blinder, A.S. , 2004.Economicss: Principles and Policy.Buckeye state: South Western College Publishing.

Competition Commission South Africa. 2007.Glossary of Footings( Hiting “Glossary” under the rubric “the Law” ) [ on-line ] . Available from: hypertext transfer protocol: // level=3 # 38 [ Accessed 14 January 2007 ] .

Murphy, TA. And Ng, Y.K. , 1974, Oligopolistic Interdependence and the Revenue Maximization Hypothesis – Note.The Journal of Industrial Economics[ online ] ,22( 3 ) , pp. 227-233. JSTOR. Available from hypertext transfer protocol: // sici=0022-1821 % 28197403 % 2922 % 3A3 % 3C227 % 3AOIATRM % 3E2.0.CO % 3B2-N

[ Accessed on 14 January 2007 ]

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