Oligopoly and its Dual Features
Introduction
A market system refers to an organized system that enables several market players to operate. Generally, this is a system that allows both bidders and sellers to communicate and conduct business deals. In the field of economics, this can be explained clearly through various market forms. Some of the most common examples of these market forms include perfect competition, imperfect competition and monopoly. Basically, these market forms have distinct features based on the amount of consumers and producers in the market, the types of goods or services offered as the level at which information can freely flow. Each of these market systems has their own advantages and drawbacks. Nonetheless, one market form, specifically oligopoly, has the features of competition and monopoly systems, allowing it to optimize the gains of both market forms. In this brief discussion, the monopolistic and competitive features of an oligopolistic system will be identified.
Oligopoly
Oligopoly is one of the prevailing market structures in the business field. This market system is also the dominating market structure in modern economies (, 1997). In this market structure, only a few firms dominate a specific industry (, 2000; , 1999). Businesses within an oligopolistic system may either produce an identical or differentiated product. When the competing firms produce identical goods or services, the competition level is only limited to the price aspect. However, when differentiated products are involved, rival firms would have to compete on various aspects including product quality, price and marketing strategies (2004). In oligopoly, each member is subjected to sufficient inter-company rivalry, which in turn prevents others from owning the market demand curve.
The players of an oligopolistic system are referred to as oligopolists. Since there are a few members or participants in this market form, each member is interdependent of the actions of other members. This type of market is mainly characterized by interactivity. In this market structure, all the members’ decision is mainly influenced by other members in an oligopoly. Moreover, in this type of market form, the responses of other members towards strategic planning are always taken into consideration so as not to create internal conflict (, 2001). Under oligopoly, the structure of the industries as well as the behaviors of the business firms may vary. As mentioned, they may produce virtually identical products like sugar, metal or chemicals. However, most oligopolists market differentiated products.
These descriptions of an oligopoly explain how this market system has both monopolistic and competitive features. Although, a single company dominates a specific industry in a monopoly, the oligopolistic system is dominated by a few major companies; having great business control over an industry makes oligopoly similar to the monopolistic setting. Among these few dominating companies, strict competition is observed. While in most instances, the price aspect dictates the competition level, the production of differentiated products further increases the competition among these few companies. Having these dual features allow the oligopolistic system to be more efficient and beneficial compared to monopoly and competition. The following section identifies the efficiency gains that oligopoly has due to its dual character.
Dual Features
In a monopolistic environment, the barriers to entry are very high that no other companies can operate in the industry. However, as other yet few companies can enter an oligopolistic system, barriers to entry are not as high. Barriers to entry pertain to the degree to which new business entrants is restricted or controlled within an industry. There are a number of barriers of entry observed in the business field. One of which is called absolute cost barriers. When firms operating within an industry are highly capital intensive, especially if the business require significant commitment or capitalization to sophisticated equipment, new business entrants tend to hesitate to enter the industry due to high start up costs.
Other entry barriers like time and patience are also required in order for the business to reach a high level of profitability. The presence of entry barriers then help in regulating competition within the system, directly benefiting the business operators. When firms become successful in an oligopolistic system, dominant market presence and established reputation are achieved. Market share is also concentrated to only a few competing firms. This makes competition even harder for new and smaller companies to enter the industry ( 2001).
Keeping a semi-monopolistic environment in an oligopoly can cause significant market failure; since the limited operating firms have considerable market shares, the production of goods or provision of services can be affected, especially in terms of quality. Without the presence of a driving force for quality production, oligopolists will only focus on the profitability aspect of business. If this environment will be considered, production is likely to be less efficient due to lack of competition, causing market letdown. This then makes the competitive factor an important feature of an oligopoly as it helps in balancing out the system.
As the limited number of companies compete with one another, business organizations are more efficient in responding to various performance pressures; moreover, they tend to work extra hard in preventing slack in inputs. In turn, resource allocation becomes more efficient; specifically, companies are more after cost-effective strategies that will allow efficient capital allocation. In addition to this, resource allocation is also enhanced in competitive market forms as business organizations become more innovative. The objective of the companies within a competitive market environment is to provide the best to the consumers; this in turn is achieved through innovation. With this strategy, companies will be able to make their products stand out in the market and eventually overcome threats of rivalry. Consumers are given with quality goods, resulting to efficient resource allocation ( 2002). Aside from innovativeness, efficient resource allocation is also achieved through competitive market reform by means of diverse products and services that consumer can benefit from.
With this dual feature, oligopoly also has access to yet another important aspect; by means of establishing a balance between total control and competitive factors of business, oligopoly allows operating companies to be interdependent of one another. With this market system characteristic, oligopolists depend very closely upon the actions of the others operating in the same market. Their behavior is necessarily influenced by the realization of mutual interdependence ( 1996). The economic theory of interdependence is based on the tendency of competing firms to follow the actions or strategies of their rivals. One example of interdependence among oligopolists is the issue on price. In oligopoly, each firm knows that in initiating price changes, other firms will also react to them. In assessing the net effects of a price change, it must take account of the probable reaction of others. If a firm decides to change the price of its goods, the company considers not only the general market situation and its own financial and stock position but also the probable behavior of its principal competitors. Within the oligopolistic environment, raising or lowering prices as well as implementing new marketing strategies will most likely be copied by rivals.
The case of AT&T, the telecom giant, can be cited as an example to explain this tendency. Back in the early 1990s, major carriers in the United States had experience a major growth reduction for the first time in the domestic long-distance market. This diminished growth in turn, led to the rise of strong negative commentaries from the financial community. The telecommunication companies must then act fast on this issue as this could lead to major adverse impacts on their capital costs. In response to this, AT&T decided to implement an end to end customer service to tie all of its customers, especially governmental and large industrial buyers (1994). As the telecom company operates in an oligopolistic environment, its major competitors Sprint and MCI followed the same strategy in the United States and in other foreign markets. In order to implement this in the international setting, both companies had established joint ventures with foreign firms (, 1995). This example then stresses the observance of interdependence among oligopolists.
While members of an oligopoly compete by reacting to ones actions, their interdependence to one another also allows them to establish business agreements. An oligopolistic situation is frequently accompanied by market-sharing arrangements between a number of producers or firms. Oligopolists involved in mutual interdependence find it convenient and profitable to coordinate their policies and strategies together. Considering that the number of interdependent firms is minimal, cooperation is easier (1996).
Conclusion
Oligopoly is a market system wherein few companies operate and compete in a certain industry. Compared to other market forms, oligopoly has dual features of both monopoly and competition systems. Through its monopolistic features, oligopolists are able to operate with less rivals; this in turn allow them to obtain considerable shares of the market. This also helps in limiting the level of competition observed in the market, making business progress faster among limited firms. The presence of competition on the other hand, helps in preventing oligopoly from market failure. Although the power to operate is only distributed to a few oligopolists, the competition factor encourages them to produce quality goods and services. This also drives them to become innovative and customer-oriented. The efficiency gains of an oligopolistic system is then concentrated on the fact that both operators and consumers benefit from this type of market system. In turn, the presence of both monopolistic and competitive features in oligopoly creates a balanced system, making it an ideal market structure.
References:
0 comments:
Post a Comment