Essay:
“Price stability in oligopolistic markets”
Market and their dynamics
Market acts as a wide platform for the seller and buyers in terms of efficient execution of the deals, trades and transactions. The presence of various systems helps the personnel to carry out business in an effective manner. As a matter of specification, these variations include perfect competition, monopoly, oligopoly, monopolistic and monopsony (Goeree and Lindsay 2016). Effective utilization of these systems acts as an agent in terms of satisfying the needs, demands and requirements of the customers.
The most common kind of market system is the perfect competition. The motive of this market system is to indulge in fair competitions for attracting large number of buyers. Adherence to the competition policies relates to the adjective “perfect” in the name of the market system. Adopting premium pricing method maintains stability in the market. Financial flexibility is crucial for bringing the stability in the financial parameter (Neary 2016). Maintenance of consistency in this stability enhances the market position of the companies and organizations.
In case of the Monopolistic markets, price stability is very easy due to the absence of competition. This type of market system entrusts the sellers with the responsibility to produce and sell quality products to the buyers at reasonable rates. Fluctuations in price is absent in this case, therefore, starting off with the premium pricing methods would helps the sellers to expand their business (Huck, Lünser and Tyran 2016). With this type of marketing system, the aspect of stability in price cannot be placed together. This is due to the absence of any competitor.
Another kind of marketing system is oligopoly. This type of marketing system is very much similar to the monopolistic market; however, the difference lies in the number of sellers. According to the functionality of this marketing system, it can be correlated to the system of perfect competition. The reason behind this is the intense competition between the sellers regarding luring the buyers. Herein, the aspect of stability attains a backseat, as there is collusion between the prices. This marketing system bears direct relationship with the requirements of the task. Along with this, application of a theoretical approach towards the aspect of maintaining this stability in the absence of collusions enlivens the market dynamics (Okuguchi 2013).
Theoretical approach to price stability
Economic theories provide a deeper insight into the financial parameter in terms of the market functions. One of the typical components of economic theory is the kinked demand curve, which depicts the fluctuations in the prices. These fluctuations contradict stability. These fluctuations make the conditions of the personnel “helpless” in terms of achieving stability in the finance. The decision to increase the price adds vulnerability to the market position of the firms. This increase in price depicts decline in the demand of the products, which adversely affects the purchasing power of the buyers (Rosser 2013). The elasticity of the demand contradicts stability in price. The net result of the escalation of price is a decline in the sales revenue of the firm. Here, instead of absenteeism of the firms, there is an intense competition, which attaches an interrogative parameter to stability in price.
On the other hand, decision to decrease the prices of the products adds stability in the market position. As a matter of specification, adopting premium pricing methods expands the market share of the firms. Here, collusion of the firm is at the highest, because once a firm attains stability in the market, they do not want to lose it (Sauaia and Kallás 2014). This situation generates intense competition between the firms, where stability seems only a temporary material.
Game theory is one of the other theories, which provides a better understanding of the fluctuations in the prices and the attempt to maintain stability. In terms of maintaining the market position, the firms are interdependent on each other. The word “game” relates to the gaming mentality of the personnel in terms of attaining the hot seat. This mentality acts as a compromise with the needs, demands and requirements of the customers (Okuguchi 2013). Countering this, the competition between firms lacks sophistication, as they hesitate to face the real market scenario. Viewing it from the other perspective, the word “game” can be considered as the attempt of the personnel to experiment with the prices for achieving large number of buyers. Exposure of rationalistic approach towards this direction possesses flexibility to bring stability in the financial parameter.
Maintaining continuity, cournet model reflects the steps undertaken by the firms for achieving stability in the parameter of finance. According to the functionality, this theory is very much similar to game theory. This is due to the projection of the steps undertaken by the firms for stabilizing their business within market (Neary 2016). Herein lays the appropriateness of the reaction curves, which represents the fluctuations in the business procedures in accordance to the market situations. Critically reviewing this, these fluctuations also occur according to the demands of the customers. Along with this, conjectural variation is the intersection of opinions regarding the achievement of stability. Unity in the opinions of the marketing personnel directly sets the ground for stability.
Insight into collusion
Interdependence of the firms possesses several connotations. This interdependence reflects the autonomy of the firms in terms of execution of business. This raises concerns regarding the firm establishment, as the competitors wait for one opportunity to give intense competition to the others (Goeree and Lindsay 2016). The aspect of competition is nullified in case of the oligopolistic market systems, as there is the presence of only the seller. Viewing it from general perspective, intense competition between the firms results in collusion. Typical components of these collusions are cartels and price leadership. The functions of cartels resemble participative management style. This is due to the involvement of the central bodies in the decision-making process of the organizations regarding the setting of prices and their outcomes on the stakeholders and shareholders (Huck, Lünser and Tyran 2016). Herein the aspect of stability can be applied in terms of the mutual agreement, which the firms achieve regarding the implementation of the proposed pricing methods. This agreement acts as an answer to the fluctuations and variations that might arise after the first meeting. Along with this, the agreement nullifies the competition between the firms and adds to the cooperation, which acts assistance for the personnel for expanding the scope and arena of their business. The attribute of cooperation possesses flexibility to restrict the entrance of startup brands, which adds maximum value to the profit margin of the firms (Rosser 2013). This makes the market scenario “collusion free”, enabling the firms to expose their talents.
References
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Baumann, F. and Friehe, T., 2015. Optimal Damages Multipliers in Oligopolistic Markets. Journal of Institutional and Theoretical Economics JITE, 171(4), pp.622-651.
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Fudenberg, D. and Tirole, J., 2013. Dynamic models of oligopoly. Taylor & Francis.
Goeree, J.K. and Lindsay, L., 2016. Market design and the stability of general equilibrium. Journal of Economic Theory, 165, pp.37-68.
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Neary, J.P., 2016. International trade in general oligopolistic equilibrium. Review of International Economics, 24(4), pp.669-698.
