Oligopoly

Oligopoly

Overview
An oligopoly is a market form in which a market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...

 or industry
Industry
Industry refers to the production of an economic good or service within an economy.-Industrial sectors:There are four key industrial economic sectors: the primary sector, largely raw material extraction industries such as mining and farming; the secondary sector, involving refining, construction,...

 is dominated by a small number of sellers (oligopolists). The word is derived, by analogy with "monopoly
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...

", from the Greek
Ancient Greek
Ancient Greek is the stage of the Greek language in the periods spanning the times c. 9th–6th centuries BC, , c. 5th–4th centuries BC , and the c. 3rd century BC – 6th century AD of ancient Greece and the ancient world; being predated in the 2nd millennium BC by Mycenaean Greek...

 ὀλίγοι (oligoi) "few" + πόλειν (pólein) "to sell". Because there are few sellers, each oligopolist is likely to be aware of the actions of the others. The decisions of one firm influence, and are influenced by, the decisions of other firms. Strategic planning
Strategic planning
Strategic planning is an organization's process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy. In order to determine the direction of the organization, it is necessary to understand its current position and the possible avenues...

 by oligopolists needs to take into account the likely responses of the other market participants.

Oligopoly is a common market form.
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Encyclopedia
An oligopoly is a market form in which a market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...

 or industry
Industry
Industry refers to the production of an economic good or service within an economy.-Industrial sectors:There are four key industrial economic sectors: the primary sector, largely raw material extraction industries such as mining and farming; the secondary sector, involving refining, construction,...

 is dominated by a small number of sellers (oligopolists). The word is derived, by analogy with "monopoly
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...

", from the Greek
Ancient Greek
Ancient Greek is the stage of the Greek language in the periods spanning the times c. 9th–6th centuries BC, , c. 5th–4th centuries BC , and the c. 3rd century BC – 6th century AD of ancient Greece and the ancient world; being predated in the 2nd millennium BC by Mycenaean Greek...

 ὀλίγοι (oligoi) "few" + πόλειν (pólein) "to sell". Because there are few sellers, each oligopolist is likely to be aware of the actions of the others. The decisions of one firm influence, and are influenced by, the decisions of other firms. Strategic planning
Strategic planning
Strategic planning is an organization's process of defining its strategy, or direction, and making decisions on allocating its resources to pursue this strategy. In order to determine the direction of the organization, it is necessary to understand its current position and the possible avenues...

 by oligopolists needs to take into account the likely responses of the other market participants.

Description


Oligopoly is a common market form. As a quantitative description of oligopoly, the four-firm concentration ratio
Concentration ratio
In economics, a concentration ratio is a measure of the total output produced in an industry by a given number of firms in the industry. The most common concentration ratios are the CR4 and the CR8, which means the four and the eight largest firms...

 is often utilized. This measure expresses the market share of the four largest firms in an industry as a percentage. For example, as of fourth quarter 2008, Verizon, AT&T, Sprint, Nextel, and T-Mobile together control 89% of the US cellular phone market.

Oligopolistic competition
Competition
Competition is a contest between individuals, groups, animals, etc. for territory, a niche, or a location of resources. It arises whenever two and only two strive for a goal which cannot be shared. Competition occurs naturally between living organisms which co-exist in the same environment. For...

 can give rise to a wide range of different outcomes. In some situations, the firms may employ restrictive trade practices (collusion
Collusion
Collusion is an agreement between two or more persons, sometimes illegal and therefore secretive, to limit open competition by deceiving, misleading, or defrauding others of their legal rights, or to obtain an objective forbidden by law typically by defrauding or gaining an unfair advantage...

, market sharing etc.) to raise prices and restrict production in much the same way as a monopoly
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...

. Where there is a formal agreement for such collusion, this is known as a cartel
Cartel
A cartel is a formal agreement among competing firms. It is a formal organization of producers and manufacturers that agree to fix prices, marketing, and production. Cartels usually occur in an oligopolistic industry, where there is a small number of sellers and usually involve homogeneous products...

. A primary example of such a cartel is OPEC
OPEC
OPEC is an intergovernmental organization of twelve developing countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. OPEC has maintained its headquarters in Vienna since 1965, and hosts regular meetings...

 which has a profound influence on the international price of oil.

Firms often collude in an attempt to stabilize unstable markets, so as to reduce the risks inherent in these markets for investment and product development. There are legal restrictions on such collusion in most countries. There does not have to be a formal agreement for collusion to take place (although for the act to be illegal there must be actual communication between companies)–for example, in some industries there may be an acknowledged market leader which informally sets prices to which other producers respond, known as price leadership.

In other situations, competition between sellers in an oligopoly can be fierce, with relatively low prices and high production. This could lead to an efficient outcome approaching perfect competition
Perfect competition
In economic theory, perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets...

. The competition in an oligopoly can be greater than when there are more firms in an industry if, for example, the firms were only regionally based and did not compete directly with each other.

Thus the welfare
Welfare economics
Welfare economics is a branch of economics that uses microeconomic techniques to evaluate economic well-being, especially relative to competitive general equilibrium within an economy as to economic efficiency and the resulting income distribution associated with it...

 analysis of oligopolies is sensitive to the parameter values used to define the market's structure. In particular, the level of dead weight loss is hard to measure. The study of product differentiation
Product differentiation
In economics and marketing, product differentiation is the process of distinguishing a product or offering from others, to make it more attractive to a particular target market. This involves differentiating it from competitors' products as well as a firm's own product offerings...

 indicates that oligopolies might also create excessive levels of differentiation in order to stifle competition.

Oligopoly theory makes heavy use of game theory
Game theory
Game theory is a mathematical method for analyzing calculated circumstances, such as in games, where a person’s success is based upon the choices of others...

 to model the behavior of oligopolies:
  • Stackelberg
    Heinrich Freiherr von Stackelberg
    Heinrich Freiherr von Stackelberg was a German economist who contributed to game theory and industrial organization and is known for the Stackelberg leadership model.-Biography:...

    's duopoly
    Duopoly
    A true duopoly is a specific type of oligopoly where only two producers exist in one market. In reality, this definition is generally used where only two firms have dominant control over a market...

    . In this model the firms move sequentially (see Stackelberg competition
    Stackelberg competition
    The Stackelberg leadership model is a strategic game in economics in which the leader firm moves first and then the follower firms move sequentially...

    ).
  • Cournot
    Antoine Augustin Cournot
    Antoine Augustin Cournot was a French philosopher and mathematician.Antoine Augustin Cournot was born at Gray, Haute-Saone. In 1821 he entered one of the most prestigious Grande École, the École Normale Supérieure, and in 1829 he had earned a doctoral degree in mathematics, with mechanics as his...

    's duopoly. In this model the firms simultaneously choose quantities (see Cournot competition
    Cournot competition
    Cournot competition is an economic model used to describe an industry structure in which companies compete on the amount of output they will produce, which they decide on independently of each other and at the same time. It is named after Antoine Augustin Cournot who was inspired by observing...

    ).
  • Bertrand
    Joseph Louis François Bertrand
    Joseph Louis François Bertrand was a French mathematician who worked in the fields of number theory, differential geometry, probability theory, economics and thermodynamics....

    's oligopoly. In this model the firms simultaneously choose prices (see Bertrand competition
    Bertrand competition
    Bertrand competition is a model of competition used in economics, named after Joseph Louis François Bertrand . It describes interactions among firms that set prices and their customers that choose quantities at that price....

    ).

Characteristics


Profit maximisation conditions: An oligopoly maximises profits by producing where marginal revenue equals marginal costs.

Ability to set price: Oligopolies are price setters rather than price takers.

Entry and exit: Barriers to entry are high. The most important barriers are economies of scale, patents, access to expensive and complex technology, and strategic actions by incumbent firms designed to discourage or destroy nascent firms. Additional sources of barriers to entry often result from government regulation favoring existing firms making it difficult for new firms to enter the market.

Number of firms: "Few" – a "handful" of sellers. There are so few firms that the actions of one firm can influence the actions of the other firms.

Long run profits: Oligopolies can retain long run abnormal profits. High barriers of entry prevent sideline firms from entering market to capture excess profits.

Product differentiation: Product may be homogeneous (steel) or differentiated (automobiles).

Perfect knowledge: Assumptions about perfect knowledge vary but the knowledge of various economic actors can be generally described as selective. Oligopolies have perfect knowledge of their own cost and demand functions but their inter-firm information may be incomplete. Buyers have only imperfect knowledge as to price, cost and product quality.

Interdependence: The distinctive feature of an oligopoly is interdependence. Oligopolies are typically composed of a few large firms. Each firm is so large that its actions affect market conditions. Therefore the competing firms will be aware of a firm's market actions and will respond appropriately. This means that in contemplating a market action, a firm must take into consideration the possible reactions of all competing firms and the firm's countermoves. It is very much like a game of chess or pool in which a player must anticipate a whole sequence of moves and countermoves in determining how to achieve his objectives. For example, an oligopoly considering a price reduction may wish to estimate the likelihood that competing firms would also lower their prices and possibly trigger a ruinous price war. Or if the firm is considering a price increase, it may want to know whether other firms will also increase prices or hold existing prices constant. This high degree of interdependence and need to be aware of what the other guy is doing or might do is to be contrasted with lack of interdependence in other market structures. In a PC market there is zero interdependence because no firm is large enough to affect market price. All firms in a PC market are price takers, information which they robotically follow in maximizing profits. In a monopoly there are no competitors to be concerned about. In a monopolistically competitive market each firm's effects on market conditions is so negligible as to be safely ignored by competitors.

Modeling


There is no single model describing the operation of an oligopolistic market. The variety and complexity of the models is because you can have two to 102 firms competing on the basis of price, quantity, technological innovations, marketing, advertising and reputation. Fortunately, there are a series of simplified models that attempt to describe market behavior under certain circumstances. Some of the better-known models are the dominant firm model, the Cournot-Nash model, the Bertrand model and the kinked demand model

Dominant firm model


In some markets there is a single firm that controls a dominant share of the market and a group of smaller firms. The dominant firm sets prices which are simply taken by the smaller firms in determining their profit maximizing levels of production. This type of market is practically a monopoly and an attached perfectly competitive market in which price is set by the dominant firm rather than the market. The demand curve for the dominant firm is determined by subtracting the supply curves of all the small firms from the industry demand curve. After estimating its net demand curve (market demand less the supply curve of the small firms) the dominant firm maximizes profits by following the normal p-max rule of producing where marginal revenue equals marginal costs. The small firms maximize profits by acting as PC firms–equating price to marginal costs.

Cournot-Nash model



The Cournot-Nash model is the simplest oligopoly model. The model assumes that there are two “equally positioned firms”; the firms compete on the basis of quantity rather than price and each firm makes an “output decision assuming that the other firm’s behavior is fixed.” The market demand curve is assumed to be linear and marginal costs are constant. To find the Cournot-Nash equilibrium one determines how each firm reacts to a change in the output of the other firm. The path to equilibrium is a series of actions and reactions. The pattern continues until a point is reached where neither firm desires “to change what it is doing, given how it believes the other firm will react to any change.” The equilibrium is the intersection of the two firm’s reaction functions. The reaction function shows how one firm reacts to the quantity choice of the other firm. For example, assume that the firm 1’s demand function is P = (M - Q2) - Q1 where Q2 is the quantity produced by the other firm and Q1 is the amount produced by firm 1, and M=60 is the market. Assume that marginal cost is CM=12. Firm 1 wants to know its maximizing quantity and price. Firm 1 begins the process by following the profit maximization rule of equating marginal revenue to marginal costs. Firm 1’s total revenue function is RT = Q1 P= Q1(M - Q2 - Q1) = M Q1- Q1 Q2 - Q12. The marginal revenue function is .
RM = CM
M - Q2 - 2Q1 = CM
2Q1 = (M-CM) - Q2
Q1 = (M-CM)/2 - Q2/2 = 24 - 0,5 Q_2 [1.1]
Q2 = 2(M-CM) - 2Q2 = 96 - 2 Q_1 [1.2]


Equation 1.1 is the reaction function for firm 1. Equation 1.2 is the reaction function for firm 2.

To determine the Cournot-Nash equilibrium you can solve the equations simultaneously. The equilibrium quantities can also be determined graphically. The equilibrium solution would be at the intersection of the two reaction functions. Note that if you graph the functions the axes represent quantities. The reaction functions are not necessarily symmetric. The firms may face differing cost functions in which case the reaction functions would not be identical nor would the equilibrium quantities.

Bertrand model


The Bertrand model is essentially the Cournot-Nash model except the strategic variable is price rather than quantity.

The model assumptions are:
There are two firms in the market
They produce a homogeneous product
They produce at a constant marginal cost
Firms choose prices PA and PB simultaneously
Firms outputs are perfect substitutes
Sales are split evenly if PA = PB


The only Nash equilibrium is PA = PB = MC.

Neither firm has any reason to change strategy. If the firm raises prices it will lose all its customers. If the firm lowers price P < MC then it will be losing money on every unit sold.

The Bertrand equilibrium is the same as the competitive result. Each firm will produce where P = marginal costs and there will be zero profits.

Kinked demand curve model



According to this model, each firm faces a demand curve kinked at the existing price. The conjectural assumptions of the model are; if the firm raises its price above the current existing price, competitors will not follow and the acting firm will lose market share and second if a firm lowers prices below the existing price then their competitors will follow to retain their market share and the firm's output will increase only marginally.

If the assumptions hold then:
The firm's marginal revenue curve is discontinuous, and has a gap at the kink
For prices above the prevailing price the curve is relatively elastic
For prices below the point the curve is relatively inelastic


The gap in the marginal revenue curve means that marginal costs can fluctuate without changing equilibrium price and quantity. Thus prices tend to be rigid.

Examples


In industrialized economies, barriers to entry
Barriers to entry
In theories of competition in economics, barriers to entry are obstacles that make it difficult to enter a given market. The term can refer to hindrances a firm faces in trying to enter a market or industry - such as government regulation, or a large, established firm taking advantage of economies...

 have resulted in oligopolies forming in many sectors, with unprecedented levels of competition fueled by increasing globalization
Globalization
Globalization refers to the increasingly global relationships of culture, people and economic activity. Most often, it refers to economics: the global distribution of the production of goods and services, through reduction of barriers to international trade such as tariffs, export fees, and import...

. Market shares in an oligopoly are typically determined by product development and advertising. For example, there are now only a small number of manufacturers of civil passenger aircraft, though Brazil (Embraer
Embraer
Embraer S.A. is a Brazilian aerospace conglomerate that produces commercial, military, and executive aircraft and provides aeronautical services....

) and Canada (Bombardier
Bombardier Aerospace
Bombardier Aerospace is a division of Bombardier Inc. and is the third-largest airplane manufacturer in the world. It is headquartered in Dorval, Quebec, Canada.- History :...

) have participated in the small passenger aircraft market sector. Oligopolies have also arisen in heavily-regulated markets such as wireless communications: in some areas only two or three providers are licensed to operate.

Australia

  • Most media outlets are owned either by News Corporation
    News Corporation
    News Corporation or News Corp. is an American multinational media conglomerate. It is the world's second-largest media conglomerate as of 2011 in terms of revenue, and the world's third largest in entertainment as of 2009, although the BBC remains the world's largest broadcaster...

    , Time Warner
    Time Warner
    Time Warner is one of the world's largest media companies, headquartered in the Time Warner Center in New York City. Formerly two separate companies, Warner Communications, Inc...

    , or by Fairfax Media
    Fairfax Media
    Fairfax Media Limited is one of Australia's largest diversified media companies. The group's operations include newspapers, magazines, radios and digital media operating in Australia and New Zealand. Fairfax Media was founded by the Fairfax family as John Fairfax and Sons, later to become John...

  • Grocery retailing is dominated by Coles Group
    Coles Group
    Coles Group Limited was an Australian public company that operated numerous retail chains. It was Australia's second-largest retailer, behind Woolworths Limited...

     and Woolworths
    Woolworths Limited
    Woolworths Limited is a major Australian company with extensive retail interest throughout Australia and New Zealand. It is the:* largest retail company in Australia and New Zealand by market capitalisation and sales...

    .
  • Banking is dominated by ANZ, Westpac
    Westpac
    Westpac , is a multinational financial services, one of the Australian "big four" banks and the second-largest bank in New Zealand....

    , NAB
    National Australia Bank
    National Australia Bank is one of the four largest financial institutions in Australia in terms of market capitalisation and customers. NAB is ranked 17th largest bank in the world measured by market capitalisation...

    , and Commonwealth Bank. To an extent this oligopoly is enshrined in law in what is known as the "Four pillars policy
    Four pillars policy
    The Four Pillars policy is a legislative policy of the Australian Government to maintain the separation of the four largest banks in Australia by disallowing their merger or acquisition by any of the other three banks....

    ", in order to ensure the stability of Australia's banking system.

Canada

  • Six companies (Royal Bank of Canada
    Royal Bank of Canada
    The Royal Bank of Canada or RBC Financial Group is the largest financial institution in Canada, as measured by deposits, revenues, and market capitalization. The bank serves seventeen million clients and has 80,100 employees worldwide. The company corporate headquarters are located in Toronto,...

    , Toronto Dominion Bank, Bank of Nova Scotia, Bank of Montreal
    Bank of Montreal
    The Bank of Montreal , , or BMO Financial Group, is the fourth largest bank in Canada by deposits. The Bank of Montreal was founded on June 23, 1817 by John Richardson and eight merchants in a rented house in Montreal, Quebec. On May 19, 1817 the Articles of Association were adopted, making it...

    , Canadian Imperial Bank of Commerce
    Canadian Imperial Bank of Commerce
    The Canadian Imperial Bank of Commerce is one of Canada's chartered banks, fifth largest by deposits. The bank is headquartered at Commerce Court in Toronto, Ontario. CIBC's Institution Number is 010, and its SWIFT code is CIBCCATT....

     and National Bank of Canada
    National Bank of Canada
    National Bank of Canada is the 6th largest bank and 8th largest financial institution in Canada. The bank's headquarters are in Montreal, Quebec....

    ) control the banking industry., three companies (Rogers Wireless
    Rogers Wireless
    Rogers Wireless is a wireless telecommunications provider offering mobile phone and data services throughout Canada using Global System for Mobile Communications and Universal Mobile Telecommunications System technology. It is a wholly owned subsidiary of Rogers Communications...

    , Bell Mobility
    Bell Mobility
    Bell Mobility is a CDMA and HSPA+ based wireless network and the division of Bell Canada which sells wireless services in Canada...

     and Telus Mobility
    Telus Mobility
    Telus Mobility is a division of Telus Communications which sells wireless services in Canada on its numerous networks. They currently have three different networks based on three different technologies: CDMA and HSPA+ on its mainstream networks, plus iDEN via its Mike division...

    ) share over 94% of Canada's wireless market.
  • 2 companies control the internet service provider market, (Rogers), (Bell)

United Kingdom

  • Five banks dominate the UK banking sector, they were accused of being an oligopoly by the relative newcomer Virgin bank.
  • Four companies (Tesco
    Tesco
    Tesco plc is a global grocery and general merchandise retailer headquartered in Cheshunt, United Kingdom. It is the third-largest retailer in the world measured by revenues and the second-largest measured by profits...

    , Sainsbury's, Asda
    Asda
    Asda Stores Ltd is a British supermarket chain which retails food, clothing, general merchandise, toys and financial services. It also has a mobile telephone network, , Asda Mobile...

     and Morrisons
    Morrisons
    Wm Morrison Supermarkets plc is the fourth largest chain of supermarkets in the United Kingdom, headquartered in Bradford, West Yorkshire, England. The company is usually referred to and is branded as Morrisons formerly Morrison's, and it is part of the FTSE 100 Index of companies...

    ) share 74.4% of the grocery market.
  • The detergent
    Detergent
    A detergent is a surfactant or a mixture of surfactants with "cleaning properties in dilute solutions." In common usage, "detergent" refers to alkylbenzenesulfonates, a family of compounds that are similar to soap but are less affected by hard water...

     market is dominated by two players, Unilever
    Unilever
    Unilever is a British-Dutch multinational corporation that owns many of the world's consumer product brands in foods, beverages, cleaning agents and personal care products....

     and Procter & Gamble
    Procter & Gamble
    Procter & Gamble is a Fortune 500 American multinational corporation headquartered in downtown Cincinnati, Ohio and manufactures a wide range of consumer goods....

    .

United States

  • Many media industries today are essentially oligopolies.
    • Six movie studios receive 90% of American film revenues.
    • The television industry is mostly an oligopoly of seven companies: The Walt Disney Company
      The Walt Disney Company
      The Walt Disney Company is the largest media conglomerate in the world in terms of revenue. Founded on October 16, 1923, by Walt and Roy Disney as the Disney Brothers Cartoon Studio, Walt Disney Productions established itself as a leader in the American animation industry before diversifying into...

      , CBS Corporation
      CBS Corporation
      CBS Corporation is an American media conglomerate focused on commercial broadcasting, publishing, billboards and television production, with most of its operations in the United States. The President and CEO of the company is Leslie Moonves. Sumner Redstone, owner of National Amusements, is CBS's...

      , Viacom
      Viacom
      Viacom Inc. , short for "Video & Audio Communications", is an American media conglomerate with interests primarily in, but not limited to, cinema and cable television...

      , Comcast
      Comcast
      Comcast Corporation is the largest cable operator, home Internet service provider, and fourth largest home telephone service provider in the United States, providing cable television, broadband Internet, and telephone service to both residential and commercial customers in 39 states and the...

      , Hearst Corporation
      Hearst Corporation
      The Hearst Corporation is an American media conglomerate based in the Hearst Tower, Manhattan in New York City, New York, United States. Founded by William Randolph Hearst as an owner of newspapers, the company's holdings now include a wide variety of media...

      , Time Warner
      Time Warner
      Time Warner is one of the world's largest media companies, headquartered in the Time Warner Center in New York City. Formerly two separate companies, Warner Communications, Inc...

      , and News Corporation
      News Corporation
      News Corporation or News Corp. is an American multinational media conglomerate. It is the world's second-largest media conglomerate as of 2011 in terms of revenue, and the world's third largest in entertainment as of 2009, although the BBC remains the world's largest broadcaster...

      . See Concentration of media ownership
      Concentration of media ownership
      Concentration of media ownership refers to a process whereby progressively fewer individuals or organizations control increasing shares of the mass media...

      .
    • Four wireless providers (AT&T
      AT&T
      AT&T Inc. is an American multinational telecommunications corporation headquartered in Whitacre Tower, Dallas, Texas, United States. It is the largest provider of mobile telephony and fixed telephony in the United States, and is also a provider of broadband and subscription television services...

      , Verizon Wireless
      Verizon Wireless
      Cellco Partnership, doing business as Verizon Wireless, is one of the largest mobile network operators in the United States. The network has 107.7 million subscribers as of 2011, making it the largest wireless service provider in America....

      , T-Mobile
      T-Mobile
      T-Mobile International AG is a German-based holding company for Deutsche Telekom AG's various mobile communications subsidiaries outside Germany. Based in Bonn, Germany, its subsidiaries operate GSM and UMTS-based cellular networks in Europe, the United States, Puerto Rico and the US Virgin Islands...

      , Sprint Nextel
      Sprint Nextel
      Sprint Nextel Corporation is an American telecommunications company based in Overland Park, Kansas. The company owns and operates Sprint, the third largest wireless telecommunications network in the United States, with 53.4 million customers, behind Verizon Wireless and AT&T Mobility...

      ) control 89% of the cellular telephone service market. This is not to be confused with cellular telephone manufacturing, an integral portion of the cellular telephone market as a whole.
  • Healthcare insurance in the United States consists of very few insurance companies controlling major market share in most states. For example, California's insured population of 20 million is the most competitive in the nation and 44% of that market is dominated by two insurance companies, Anthem
    Anthem (insurance)
    Anthem was an insurance company which began in the 1980s as a spin-off of the group insurance operations of American General Insurance. From its move to a publicly-traded company in 2001 until its final merger in 2004, it merged the Blue Cross Blue Shield organizations of several states to achieve...

     and Kaiser Permanente
    Kaiser Permanente
    Kaiser Permanente is an integrated managed care consortium, based in Oakland, California, United States, founded in 1945 by industrialist Henry J. Kaiser and physician Sidney Garfield...

    .
  • Anheuser-Busch
    Anheuser-Busch
    Anheuser-Busch Companies, Inc. , is an American brewing company. The company operates 12 breweries in the United States and 18 in other countries. It was, until December 2009, also one of America's largest theme park operators; operating ten theme parks across the United States through the...

     and MillerCoors
    MillerCoors
    MillerCoors is a joint venture between SABMiller and Molson Coors Brewing Company, announced on October 9, 2007. The joint venture has the responsibility of selling brands such as Miller Lite, Miller High Life, Miller Genuine Draft, Coors, Coors Light, Molson Canadian, and Blue Moon in the United...

     control about 80% of the beer industry.

Worldwide

  • The accountancy
    Accountancy
    Accountancy is the process of communicating financial information about a business entity to users such as shareholders and managers. The communication is generally in the form of financial statements that show in money terms the economic resources under the control of management; the art lies in...

     market is controlled by PriceWaterhouseCoopers
    PricewaterhouseCoopers
    PricewaterhouseCoopers is a global professional services firm headquartered in London, United Kingdom. It is the world's largest professional services firm measured by revenues and one of the "Big Four" accountancy firms....

    , KPMG
    KPMG
    KPMG is one of the largest professional services networks in the world and one of the Big Four auditors, along with Deloitte, Ernst & Young and PwC. Its global headquarters is located in Amstelveen, Netherlands....

    , Deloitte Touche Tohmatsu
    Deloitte Touche Tohmatsu
    Deloitte Touche Tohmatsu Limited , commonly referred to as Deloitte, is one of the Big Four accountancy firms along with PricewaterhouseCoopers , Ernst & Young, and KPMG....

    , and Ernst & Young
    Ernst & Young
    Ernst & Young is one of the largest professional services networks in the world and one of the "Big Four" accountancy firms, along with Deloitte, KPMG and PricewaterhouseCoopers ....

     (commonly known as the Big Four
    Big Four auditors
    The Big Four are the four largest international professional services networks in accountancy and professional services, which handle the vast majority of audits for publicly traded companies as well as many private companies, creating an oligopoly in auditing large companies...

    )
  • Three leading food processing companies, Kraft Foods
    Kraft Foods
    Kraft Foods Inc. is an American confectionery, food and beverage conglomerate. It markets many brands in more than 170 countries. 12 of its brands annually earn more than $1 billion worldwide: Cadbury, Jacobs, Kraft, LU, Maxwell House, Milka, Nabisco, Oscar Mayer, Philadelphia, Trident, Tang...

    , PepsiCo
    PepsiCo
    PepsiCo Inc. is an American multinational corporation headquartered in Purchase, New York, United States, with interests in the manufacturing, marketing and distribution of grain-based snack foods, beverages, and other products. PepsiCo was formed in 1965 with the merger of the Pepsi-Cola Company...

     and Nestle
    Nestlé
    Nestlé S.A. is the world's largest food and nutrition company. Founded and headquartered in Vevey, Switzerland, Nestlé originated in a 1905 merger of the Anglo-Swiss Milk Company, established in 1867 by brothers George Page and Charles Page, and Farine Lactée Henri Nestlé, founded in 1866 by Henri...

    , together achieve a large proportion of global processed food sales. These three companies are often used as an example of "Rule of three
    Rule of three (economics)
    The rule of three in Business and Economics is a rule of thumb suggesting that there are always three major competitors in any free market within any one industry. This was put forward by Bruce Henderson of the Boston Consulting Group in 1976, and has been tested by Jagdish Sheth and Rajendra...

    ", which states that markets often become an oligopoly of three large firms.
  • Boeing
    Boeing
    The Boeing Company is an American multinational aerospace and defense corporation, founded in 1916 by William E. Boeing in Seattle, Washington. Boeing has expanded over the years, merging with McDonnell Douglas in 1997. Boeing Corporate headquarters has been in Chicago, Illinois since 2001...

     and Airbus
    Airbus
    Airbus SAS is an aircraft manufacturing subsidiary of EADS, a European aerospace company. Based in Blagnac, France, surburb of Toulouse, and with significant activity across Europe, the company produces around half of the world's jet airliners....

     have a duopoly over the airliner market.
  • General Electric
    General Electric
    General Electric Company , or GE, is an American multinational conglomerate corporation incorporated in Schenectady, New York and headquartered in Fairfield, Connecticut, United States...

    , Pratt and Whitney and Rolls-Royce plc
    Rolls-Royce plc
    Rolls-Royce Group plc is a global power systems company headquartered in the City of Westminster, London, United Kingdom. It is the world’s second-largest maker of aircraft engines , and also has major businesses in the marine propulsion and energy sectors. Through its defence-related activities...

     own more than 50% of the marketshare in the airliner engine market.

Demand curve


In an oligopoly, firms operate under imperfect competition
Imperfect competition
In economic theory, imperfect competition is the competitive situation in any market where the conditions necessary for perfect competition are not satisfied...

. With the fierce price competitiveness created by this sticky-upward
Sticky (economics)
Sticky, in the social sciences and particularly economics, describes a situation in which a variable is resistant to change. Sticky prices are an important part of macroeconomic theory since they may be used to explain why markets might not reach equilibrium right away. Nominal wages are often said...

 demand curve
Demand curve
In economics, the demand curve is the graph depicting the relationship between the price of a certain commodity, and the amount of it that consumers are willing and able to purchase at that given price. It is a graphic representation of a demand schedule...

, firms use non-price competition
Non-price competition
Non-price competition is a marketing strategy "in which one firm tries to distinguish its product or service from competing products on the basis of attributes like design and workmanship"...

 in order to accrue greater revenue and market share.

"Kinked" demand curves are similar to traditional demand curves, as they are downward-sloping. They are distinguished by a hypothesized convex bend with a discontinuity at the bend–"kink". Thus the first derivative
Derivative
In calculus, a branch of mathematics, the derivative is a measure of how a function changes as its input changes. Loosely speaking, a derivative can be thought of as how much one quantity is changing in response to changes in some other quantity; for example, the derivative of the position of a...

 at that point is undefined and leads to a jump discontinuity in the marginal revenue curve
Marginal revenue
In microeconomics, marginal revenue is the extra revenue that an additional unit of product will bring. It is the additional income from selling one more unit of a good; sometimes equal to price...

.

Classical economic theory
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

 assumes that a profit-maximizing producer with some market power (either due to oligopoly or monopolistic competition
Monopolistic competition
Monopolistic competition is imperfect competition where many competing producers sell products that are differentiated from one another...

) will set marginal costs equal to marginal revenue. This idea can be envisioned graphically by the intersection of an upward-sloping marginal cost curve and a downward-sloping marginal revenue curve (because the more one sells, the lower the price must be, so the less a producer earns per unit). In classical theory, any change in the marginal cost structure (how much it costs to make each additional unit) or the marginal revenue structure (how much people will pay for each additional unit) will be immediately reflected in a new price and/or quantity sold of the item. This result does not occur if a "kink" exists. Because of this jump discontinuity in the marginal revenue curve, marginal cost
Marginal cost
In economics and finance, marginal cost is the change in total cost that arises when the quantity produced changes by one unit. That is, it is the cost of producing one more unit of a good...

s could change without necessarily changing the price or quantity.

The motivation behind this kink is the idea that in an oligopolistic or monopolistically competitive market, firms will not raise their prices because even a small price increase will lose many customers. This is because competitors will generally ignore price increases, with the hope of gaining a larger market share as a result of now having comparatively lower prices. However, even a large price decrease will gain only a few customers because such an action will begin a price war
Price war
Price war is a term used in economic sector to indicate a state of intense competitive rivalry accompanied by a multi-lateral series of price reduction. One competitor will lower its price, then others will lower their prices to match. If one of them reduces their price again, a new round of...

 with other firms. The curve is therefore more price-elastic
Elasticity (economics)
In economics, elasticity is the measurement of how changing one economic variable affects others. For example:* "If I lower the price of my product, how much more will I sell?"* "If I raise the price, how much less will I sell?"...

 for price increases and less so for price decreases. Firms will often enter the industry in the long run.

See also

  • Big Business
    Big Business
    Big business is a term used to describe large corporations, in either an individual or collective sense. The term first came into use in a symbolic sense subsequent to the American Civil War, particularly after 1880, in connection with the combination movement that began in American business at...

  • Monopsony
    Monopsony
    In economics, a monopsony is a market form in which only one buyer faces many sellers. It is an example of imperfect competition, similar to a monopoly, in which only one seller faces many buyers...

  • Oligopolistic reaction
    Oligopolistic reaction
    An oligopolistic reaction is a concept from economics introduced by Frederick T. Knickerbocker to explain why firms follow rivals into foreign markets. Under conditions of growth in an economy, US firms match the investments of competitors into that economy...

  • Oligopsony
    Oligopsony
    An oligopsony is a market form in which the number of buyers is small while the number of sellers in theory could be large. This typically happens in a market for inputs where numerous suppliers are competing to sell their product to a small number of buyers...

  • Perfect competition
    Perfect competition
    In economic theory, perfect competition describes markets such that no participants are large enough to have the market power to set the price of a homogeneous product. Because the conditions for perfect competition are strict, there are few if any perfectly competitive markets...

  • Prisoner's Dilemma
    Prisoner's dilemma
    The prisoner’s dilemma is a canonical example of a game, analyzed in game theory that shows why two individuals might not cooperate, even if it appears that it is in their best interest to do so. It was originally framed by Merrill Flood and Melvin Dresher working at RAND in 1950. Albert W...

  • Simulations and games in economics education
    Simulations and games in economics education
    A simulation game is "a game that contains a mixture of skill, chance, and strategy to simulate an aspect of reality, such as a stock exchange". Similarly, Ruohomaki states that "a simulation game combines the features of a game with those of a simulation...

  • Swing producer
    Swing producer
    Swing producer is a supplier or a close oligopolistic group of suppliers of any commodity, controlling its global deposits and possessing large spare manufacturing capacity...


External links