Management Economics Assignment – 2

Q1. Is an oligopolistic marketplace structure one of market failure? Explain you answer. To comprehend if an oligopolistic market structure is one of market failure, we initially need to understand oligopolistic markets. An oligopolistic market is one out of which the marketplace is dominated with a small number of large firms. Oligopoly exists in several markets such as the cola market, petroleum, breakfast cereals and so forth In these marketplaces, the activities of such firms are interdependent. They already know everything they do will impact the market and their competitors. For example , if Soft drink starts a significant advertising campaign, we can be sure that Cocaina Cola will follow suit. Coca Cola know that if they just do not advertise, they may probably drop market share to Pepsi. The quantity of firms in oligopolistic market segments can vary by two to as many as 20 and still be considered an oligopolistic market structure. If there are only two firms, it is a duopoly. These large firms within an oligopolistic industry control the market. Each company has a substantial degree of marketplace control. And so the action of one firm may influence the actions with the others. This kind of interdependence of firms leads to collusion between the firms. Collusion is a contract between companies to limit the competition amidst them also to raise the boundaries of access to keep potential competitors away. Without developing these deals, the companies in an oligopolistic market confront a high amount of uncertainty of the rival's reactions. Consider this scenario: - If Pepsi reduces the price of a can of Pepsi, in that case Coke follows suit and reduce their selling price as well which in turn might cause Soft drink to reduce rates again resulting in a price battle with prices leading progressively downwards. This is bad for business and can bring about firms getting led bankrupt, maybe your firm that first made a decision to lower it is prices. And so co-ordination between firms can easily reduce the risk of a firm starting a series of negative reactions which might leave just about every firm within a bad state. Firms can also collude to behave as a monopolist. If two firms mix to form a one firm, after that this solitary firm may have a much increased degree of market control. Collusive oligopoly can be explained as " the agreement amongst firms available in the market about volumes to produce and price to change. ” (N. Gregory Mankiw and Tag P The singer 2006 pg. 323) Generally in most oligopolistic markets, the companies tend to maintain your price comparatively rigid. That they prefer to guard market share by other means such as advertising, product difference and obstacles to entrance. It makes more impression for firms to increase their very own market share without having to reduce their particular prices. Oligopolistic markets can easily exist in industries which produce identical products whilst in the industries that produce diverse products. Types of identical merchandise oligopolies happen to be industries just like aluminium, metallic etc . To describe it in the case in industries concerning raw materials. Types of differentiated item oligopolies are industries including computers, music players, automobiles etc . A cartel is known as a formal arrangement among contending firms to fix prices, production etc . The organization of association in outlawed in several countries such as the ALL OF US, UK etc . Barriers to entry would be the difficulties a good faces because it attempts to find yourself in a market. Associated with entry within a market might affect the behavior of proven firms because market, in oligopolistic market segments, who wish to maintain potential rivals out. A fresh firm may not enter a certain market though they feel the industry could be profitable mainly because they feel that the established firms is going to cut their prices to force the brand new firm away. Established firms will probably be capable to survive for a short run upon losses from past income. There are several methods established organizations can prevent new entrants from entering a market. Some are: - Legal obstacles –...

Bibliography: Greedy, John 1949. Pg 144. Economics an integrated procedure

http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=oligopoly

Clower, Robert, 1972, pg 220, Microeconomics

Taylor, John B.  Economics.  Pg 172, 2nd education. Houghton Mifflin Co., 1998.

Mansfield, Edwin.  Principles of Microeconomics. Pg 248, 7th ed. T. W. Norton & Business, 1992.

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