Chapter 14, Problem 1DQ

To determine

Why oligopolies exist.

Explanation of Solution

An oligopoly is a limited competition market. It may exist because of various reasons. The economies of scale are an important reason for an oligopoly. The economies of scale help the firms to produce at the lowest possible average cost. When the firms are producing at the minimum average cost, it will increase the profit of the firms. Only large firms will have good economies of scale and thus, they can easily capture the market. The small firms and new entrants would require investing more capital in order to get the economies of scale. Thus, the small firms cannot produce at the minimum average cost and as a result, they will be eventually driven out of the market leading to the establishment of the oligopoly.

Branding and advertisements have a high impact on the consumers. They will create a strong preference in the consumers over other products and provide a monopolistic power to the seller. Such huge advertising and branding are not possible for the small firms and as a result, they will have to eventually move out of the market because of the loss of the demand and the revenue which will create the oligopoly.

Many large sellers and producers will merge together in order to further strengthen the economies of scale, which will in turn increase their profits by reducing the cost of production. It will force small firms out of the market, creating an oligopoly.

Important examples for oligopoly products that are common in day-to-day life are automobile manufacturers; the companies that produce automobiles are very few in number. Similarly, gasoline producers are very few in number. Even though there are many companies, the manufacturers of computer chips are very few in number. The manufacturers of mobiles, as well as computer operating systems, are very few in number. These are the examples of oligopoly seen day-to-day.

An oligopoly differs from a monopolistic competition in many ways. The main difference is seen in the number of players. There are a large number of players in the monopolistic competition, whereas there are only few in an oligopoly.

The market power is very small in monopolistic competition, but the market share is very high in the oligopoly market. Similarly, the products in the monopolistic competition are differentiated, whereas they are not completely in the oligopoly. The oligopoly market sometimes sells similar products, too.

By and large, there is easy entry and exit to the market in monopolistic competition. But the entry and exit into an oligopoly has strict barriers.

Economics Concept Introduction

Concept introduction:

Oligopoly: It is an imperfect market condition. There will be a few players in the market. The market will be shared between the few sellers, thus. This is why the market condition is known to be in a state of limited competition.