Understanding Oligopolies

Definition and Origin

• Oligopoly: Market structure characterized by a few sellers.
  • Derived from Greek:
    • "Oligo" = Few
    • "Polien" = Sellers
• Can behave like monopolies or exhibit fierce competition.

Characteristics of Oligopolies

• Few competitors in the market.
• Companies can coordinate to restrict quantity and raise prices, maximizing collective profit.
• Coordination is often illegal and termed as collusion.
• A formal agreement to collude forms a cartel.

Examples of Cartels

• OPEC (Organization of Petroleum Exporting Countries)
  • Controls 79% of the world's oil reserves (as of 2012).
  • Accounts for 44% of global oil production.
  • Attempts to restrict output to influence global oil prices.
  • Difficulty in maintaining discipline among members.

Competitive Oligopolies

• Not all oligopolies collude.
• Coke and Pepsi: Fierce competitors in the sugar water market.
  • Compete intensely on marketing and price.
  • An example of a duopoly: Only two major players in the market.
• Boeing and Airbus: Compete in the commercial aircraft market.
  • Both claim the other receives unfair governmental support.

Oligopolies Approaching Perfect Competition

• Airlines: Few competitors, prices are well-known, and closely monitored by each other.
  • Example of an oligopoly nearing perfect competition.
• Credit Card Networks: Dominated by Visa, MasterCard, and American Express.

Government Regulation

• Governments aim to prevent collusion and encourage competition.
• Encouraging competition leads to efficient production and higher consumer surplus.
• Regulatory measures ensure markets work closer to perfect competition.

Conclusion

• Oligopolies can range from monopolistic behavior to fierce competition.
• Regulation is crucial to maintain market efficiency and consumer benefits.
• Future discussions will explore the complexities and incentives within these market structures.