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Main Characteristics Of Oligopoly

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Questions:

1. What are the main characteristics of an oligopoly? Give real world examples.
2. Why could the market for chewing gum be said to be oligopolistic?
3. Why do you think that firms choose not to compete on price?
4. What are the main barriers to entry in the chewing gum market?

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Answers:

1. Main Characteristics of Oligopoly

Oligopoly is an important market type in which there are few firms that accounts for producing and selling a product. In simple words, it can be best described as a market situation which explains competition between the two. It is therefore identified as a kind of imperfect market situation where there are few firms in the market and they are known for producing homogenous product or they account for producing products which are close but not the perfect substitute of each other. An analysis of this market type indicates that there are certain major unique characteristics of this market type (Sloman and Smith, 2011). These characteristics are briefly summarised as follows:

  • Interdependence: This is an important characteristic of oligopoly market situation. The firms in such market condition are interdependent in making important decisions. This is mainly because there are few firms, and any changes made by one firm will have immediate effect by others in the market to address such competitor’s move. There is a direct influence of decisions that are taken by a firm over its rivals in oligopoly, and this leads to higher level of interdependency in such market structure (Sloman, 2007).
  • Few sellers: There are few sellers in such oligopoly market that accounts for meeting out the needs and requirements of their customers. Example includes Wrigley and Cadbury Schweppes. Oil industry can be oligopoly for example because it includes OPEC the major seller (Sloman and Smith, 2011).
  • Barriers to Entry: This is another important characteristic of oligopoly market structure, and it suggests that oligopoly firms are larger enough to achieve economies of scale. They have huge amount of know-how and capital which makes it difficult for the new seller to enter into the industry and compete with these already established firms. For example, it would be difficult for a new chewing manufacturing firm to enter into the industry because of such great presence of Wrigley and Cadbury Schweppes in such market (Gwartney, Stroup and Clark, 2014).
  • Prevalent Advertising: Oligopoly firms are known for performing the advertisement at the national levels.

These are some of the basic characteristics of oligopoly firms which make them different from that of their competitors.

2. Market for Chewing Gum as Oligopoly

The market for chewing gum can be regarded as oligopoly market condition because it satisfied the important characteristics of being an oligopoly firm. As for instance, the important feature of oligopoly as noted above signifies that in oligopoly market, there are few firms occupying majority of the market share. In respect to the chewing market as well, it is the Cadbury Schweppes and Wrigley that have dominated majority of the market share. This is an important characteristic of oligopoly market condition. Secondly, it has also been evaluated that it is extremely difficult for a new market player to enter into such industry because the existing firms are operating at a large level and they have already achieved economies of scale. As a result, it becomes difficult for the new player to enter into such industry. In respect to the chewing gum market as well, Wrigley and Cadbury Schweppes have established their brand reputation. This is therefore an important indicating factor that the market condition of chewing market satisfies the oligopoly market structure. The point of interdependence is also evident in respect to the performance of Schweppes and Wrigley because the major decisions as undertaken by a firm has an impact over the others. All these reasons lead to conclusion that the market for Schweppes and Wrigley are considered as oligopoly market (Sloman and Smith, 2011).

 

3. Reasons for Firms Choosing not to Compete on Price

Competition is an important phenomenon that is evident in respect to the performance of an industry. Businesses compete with each other with a view to achieve larger market share so that they can sustain their growth and development. However, an important factor in this regard as applicable is mainly in respect to oligopolistic market situation. It is analysed that businesses in respect to such market condition of oligopoly do not compete with each other on price. There are a large number of reasons behind it. The first major reason could be the immediate move by other firms in the industry. As analysed above, there is an interdependency factor in respect to oligopoly firms, and the move of a single firm would result into the retaliation by other. As a result, a price increase/decrease will result into an immediate action by other which could affect their market share and position in the industry (Sloman, 2007).

Apart from the above reason, there could be other major reasons for which the firms choose not to compete on price. As for instance, there are few major firms that dominate the entire industry. As a result, it has been a good opportunity to them in achieving higher level of growth and success on their performance rather than competing with each other on price. By mutually setting up prices at reasonably higher level, it could be possible to ensure higher level of growth and success of the firm. In addition to this, the case study analysis has also indicated that oligopoly firms make slight differences in their product as compared to their competitors, and this particular strategy allows them in achieving higher growth and success. As a result of these particular reasons, there are lower chances of oligopoly firms competing on price levels (Tanter and Ullman, 2015).  

4. Main Barriers to Entry in the Chewing Market

The case analysis of the chewing market has been performed and the performance of analysis indicated that there are certain major barriers to market entry that are evident within it. As for instance, the most significant barriers to entry as noted is mainly the nature and characteristics of such market. It has been analysed that the market structure is Oligopoly market structure whereby the majority of the market share has been occupied by the two major players including Cadbury Schweppes and Wrigley. As a result, they would not allow the third party to enter into the market and perform sharing in their market share. Apart from this particular barrier, another major barrier that has been noted is mainly in terms of the capital needed for investment. The capital needed is huge to enter into such market conditions which could adversely affect the motivation of new companies to enter into the industry. This is therefore also regarded as a major obstacle in the process of performing the entry into such industry (Ghai and Gupta, 2002).

Apart from these major barriers, the analysis of the chewing gum industry also indicates that it is essential to have good brand reputation in such industry to succeed. Even though some companies would infuse huge capital in performing the start-up of their venture, but the most important criterion is their brand image and reputation in the industry. For a new firm, it is extremely difficult to build up reputation in a short span of time. As a result, brand reputation along with the capital needed is the major constraints that could impact the desire of a new firm to enter into a particular industry. In addition to above all factor, the existing firms would not allow a new firm to set in the industry. They would not be willing to share their market share with the firm which could be identified as a major factor affecting the desire of a new firm to enter into the industry. Thus, an analysis above has indicated the oligopoly characteristics, and the major characteristics of such market structure.

 

References

Ghai and Gupta, (2002), ‘Microeconomics Theory And Applications’, Sarup & Sons.

Gwartney, J.D., Stroup, R. and Clark, J.R. (2014), ‘Essentials of Economics’, Academic Press.

Sloman, J. (2007), ‘Essentials of Economics’, Financial Times Prentice Hall.

Sloman, J. and Smith, P. (2011), ‘Economics Student Workbook’, 8th ed., Pearson Education, Limited.

Tanter, R. and Ullman, R.H. (2015), ‘Theory and Policy in International Relations’, Princeton University Press.

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