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Discuss whether oligopolistic industries always operate against the interests of consumers. [13]

cambridge a level june 2019

Quick Answer:

Oligopoly refers to a market where there are a few relatively large firms producing either differentiated or homogeneous product.

In addition, it is assumed that barriers to entry are fairly substantial and knowledge by no means is perfect.
Thus oligopoly is an industry where there is a high level of market concentration.
Firms, therefore, are mutually interdependent for if any one firm changes its behaviour, this can have a major impact on the demand curve facing the other firms.
Oligopolistic firms, therefore, adopt a strategic behavior anticipating all possible actions and reactions of rival firms for they operate under uncertain market conditions.
Being interdependent firms in an oligopolistic market face a dilemma between competition and cooperation.

Oligopoly behaviours :
- collusion

For oligopolistic firms there is much to be gained from cooperation amid uncertain market conditions.
This cooperation may take the form of collusion.
It is an agreement on price charged and level of output produced.
It therefore makes it possible for firms to act as a monopoly and collectively maximize profits for the industry by eliminating competition.

A kinked demand curve explains stability in a non-collusive oligopoly, it assumes that a business might face a dual demand curve for its product based on the likely reactions of other firms in the market to a change in its price.
The common assumption of the theory is that firms in an oligopoly are looking to protect and maintain their market share and that rival firms are unlikely to match another's price increase but may match a price fall.
If firms in an oligopolistic market act collusively they will in effect be acting together as a monopoly. In such a case, oligopoly is likely to exploit consumers the same way as does a monopoly

- price fixing
- barriers to entry preventing competition
Moreover, the firms, sheltered by barriers to entry, can still make large profits even if they are innefficient.
Consumers therefore have to pay a higher price for their inefficiencies.
With or without collusion the firms in oligopoly are also said to be involved in wasteful competition that uses scarce resources which could be put to alternative uses in producing more goods.
Expenditure on practices such as promotion and advertisement tend to raise the price paid by the consumers.

But benefits for consumers:

-new product development

Oligopolistic firms are more likely to innovate.
Being aware that new products and processes by rival firms can threaten their survival, existing firms must have a powerful incentive to engage continuously in R & D.
Innovative new products often enable these firms to maintain or increase their profit.
Thus innovation can strengthen their existing market power and at the same time it could benefit the consumer by offering products of higher quality with improved features.

-economies of scale

-price discrimination

-price war
There is a possibility of price competition.
Consumers benefit from a price cutting by firms but price wars prove to be costly for firms, therefore, they are short lived.
As an alternative strategy oligopolistic firms may engage in non-price competition such as product differentiation through advertising or creating a brand image for their product.
They may also offer a particular after-sales service or package the product in a particular way.

So firms in oligopolistic markets inevitably face interdependence and uncertainty that they try and overcome by many different ways.
The consumers, however, are more likely to face exploitation when firms collude.
In a non-collusive competitive oligopoly the element of exploitation is largely offset by the benefits that consumers gain from intense rivalry among the firms.

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