Oligopolies

Oligopoly and monopolistic competition have some similarities, but also have a few important differences. Both are examples of imperfect competition on the market structure continuum between ideals of perfect competition and monopoly. The dividing line between oligopoly and monopolistic competition can be blurred due to the number of firms in the industry.  The primary difference between oligopoly and monopolistic competition is the relative size and the

market control

of each firm based on the number of competitors in the market.  There is no clear-cut dividing line between these two market structures, for example, the women’s and girl’s cut and sew apparel manufacturing and fluid milk manufacturing industries.

RUNNING HEAD:

Oligopolies

1

RUNNING HEAD: OLIGOPOLY 3

Oligopolies

Debra Johnson

Principles of Microeconomics
Instructor: Greg Kropkowski
July 18, 2012

Oligopoly and

monopolistic competition

have some similarities, but also have a few important differences. Both are examples of imperfect competition on the market structure continuum between ideals of perfect competition and

monopoly

. The dividing line between oligopoly and monopolistic competition can be blurred due to the number of

firm

s in the

industry

. The primary difference between oligopoly and monopolistic competition is the relative size and the

market control

of each firm based on the number of competitors in the market. There is no clear-cut dividing line between these two market structures, for example, the women’s and girl’s cut and sew apparel manufacturing and fluid milk manufacturing industries.

Characteristics of an Oligopoly

An industry is a group of firms that produce goods or services that are close substitutes in consumption. The similarity of the products makes it possible to analyze the production in a market structure. An industry can be broadly defined, such as the manufacturing industry, or narrowly specified, such as the fluid milk industry. For most economic analysis the term industry is used interchangeably with the term market.

Oligopoly is a market structure characterized by a small number of relatively large firms that dominates an industry. The market can be dominated by as few as two firms or as many as twenty, and still be considered oligopoly. With fewer than two firms, the industry is monopoly. As the number of firms increase, with no exact number, oligopoly becomes monopolistic competition. (Case, Fair, Oster, 2009) p.284.

An oligopolistic firm is relatively large compared to the overall market, and has a substantial degree of market control. An oligopoly does not have the total control over the supply side as exhibited by a monopoly, but its capital is significantly greater than that of a monopolistically competitive firm. (Case, Fair, Oster, 2009) p.296.

Relative size and extent of market control means that interdependence among firms in an industry is a key feature of oligopoly. The actions of one firm depend on and influence the actions of another. Such interdependence creates a number of interesting economic issues. One is the tendency for competing oligopolistic firms to turn into cooperating oligopolistic firms. When they do, inefficiency worsens, and they tend to come under the scrutiny of government. (Case, Fair, Oster, 2009) p.296.

THE ROLE OF CONCENTRATION RATIOS

The four-firm concentration is commonly used to indicate the degree to which an industry is oligopolistic and the extent of market control held by the four largest firms in the industry. For example, the NAICS 31-33 Statistics Report (2007) shows that the four largest Fluid Milk Manufacturing (311511) reported 51.5 percent concentration ratio. The

Women’s and Girls’ Cut and Sew Apparel Manufacturing

(31523) reported at 18.2 percent. (Concentration Ratios NAICS, 2007).

Concentration ratios, especially the four-firm concentration ratio, are designed to measure industry concentration, and by inference the degree of market control. Concentration ratios range from a low of 0 percent to a high of 100 percent. At the low end, a 0 percent concentration ratio indicates an extremely competitive market. At the high end, a 100 percent concentration ratio means an extremely concentrated oligopoly or even monopoly if the one-firm concentration ratio is 100 percent. Fluid Milk Manufacturing (51.5) and the Women’s and Girls’ Cut and Sew Apparel Manufacturing (18.2) qualify as oligopolies. (Concentration Ratios NAICS, 2007).

Certainly, there is much to guard against in the behavior of large, concentrated industries. Barriers to entry, large size, and product differentiation all lead to market power and to potential inefficiency. Barriers to entry and collusive behavior stop the market from working toward an efficient allocation of resources. For several reasons, however, economists no longer attack industry concentration with the same fervor they once did. (Case, Fair, Oster, 2009) p.301.

First, even firms in highly concentrated industries can be pushed to produce efficiently under certain market circumstances. Second, the benefits of product differentiation and product competition are real. After all, a constant stream of new products and new variations of old products comes to the market almost daily. Third, the effects of concentration on the rate of R&D spending are, at worst, mixed. It is true that large firms do a substantial amount of the total research in the United States. (Case, Fair, Oster, 2009) p.301.

In some industries, substantial economies of scale simply preclude a completely competitive structure.

References

Case, K.E., Fair, R.C., and Oster, S.E. (2009). Principles of Macroeconomics. (9th ed). Upper Saddle River, New Jersey: Pearson Prentice Hall.

United States Department of Commerce, US Census Bureau, Concentration Ratios NAICS (2007). Retrieved from: http://www.census.gov/econ/concentration.html