IndexAbstractIntroductionTheoretical ReviewsMarket EffectsAdvantages and Disadvantages of OligopolyThe Cournot ModelPrisoner's DilemmaOligopoly Markets in the UKOligopoly Cartel TheoryConclusionReferencesAbstractThe purpose of this research is to to examine the concept of oligopoly, its effects and characteristics on the market using the right mix of theories and presenting real cases. The research will also show the impacts of oligopoly on the economy. Several real cases of oligopoly will be shown using different theories and models such as game theory, prisoner's dilemma, cartel theory and Cournot model. Say no to plagiarism. Get a tailor-made essay on "Why Violent Video Games Shouldn't Be Banned"? Get an original essay IntroductionWhat is meant by market structure? It is the environment in which companies produce and sell their products. A market structure has three key characteristics. The first characteristic is the number of companies present on the market. Some markets have many companies competing with each other, while others have few or even just one company providing a product or service. The next characteristic of a market structure is the ease of entry and exit, such as the requirements to produce the product or service and barriers to entry. An example of a barrier to entry is how expensive it is to produce and sell in that market, or barriers such as government regulations. The third characteristic is product differentiation within the market. The uniqueness of your product will determine the market structure your company is part of. Oligopoly is a type of market structure that involves a limited number of firms, more than one but few enough that each firm can influence and impact the market. The maximum number of firms in an oligopoly is determined by how few firms there must be for the actions of one to have a significant impact on the others, meaning that the firms are interdependent. Examples of oligopolies include oil companies, automobile manufacturers, wireless operators, and steel producers. The reason there are few companies in this type of model is because entry and exit are difficult. The cost of entering this type of market structure is what keeps most companies out. Because of the limited number of firms in an oligopoly, firms usually spend little on product promotion. When differentiating markets, it's important to understand what makes them different. The main difference between oligopoly and other market structures are their characteristics such as the number of firms, entry conditions, type of product and their behaviors such as pricing strategy and promotional strategies. Theoretical Revisions Market Effects Oligopoly has various economic impacts resulting from its models. The effects of oligopoly are restrictions on the quantity of production. Due to the limited number of enterprises, production is small and prices are high compared to other market structures. Product prices in an oligopolistic market exceed average cost due to barriers to entry. The effects of oligopoly can also be negative on the national economy. The oligopoly could be described as an “established market,” a market in which the industry and prices are all set. This allows existing firms to prevent new firms from entering the market by controlling price and thus causing new firms to operate at a loss of revenue. Some cases of oligopolistic markets even have companies sharing the market, which leads to inflation ofgeneral price level. This may be good for businesses, but for consumers it's a shame. Why is the topic important? Understanding oligopoly and its effects on the market is important for managing and regulating it. A firm in an oligopolistic market must know what its competitors are doing when making its decisions. When oligopolies act monopolistically, they tend to raise prices. This leads to economic damage. By understanding this market behavior, policies can be developed and regulated to prevent further damage to the economy. Advantages and Disadvantages of Oligopoly An oligopolistic market has advantages and disadvantages for both companies and consumers. Advantages of Oligopoly: High Profits: Due to the limited number of firms in an oligopoly, firms can earn high profits due to low competition. Products or services under the control of oligopolies are generally in high demand. Simple and few choices: consumers have the ability to carefully choose the product they want because it is easier to compare them in this type of market. In other markets with large competitors, price points and product differentiation make consumer choice difficult. Competitive Pricing: Usually the only differentiation between products is price, this causes companies to lower prices to compete with other similar companies. This is great for consumers as prices will eventually drop. Progress in products: Due to the number of competitors and similarities of products in the oligopoly, progress in products is seen very often in this type of market because every company is trying its best to gain the loyalty and trust of the customers in the market. The disadvantages of oligopoly: Difficulty of entry: it is very difficult for a new company to enter an oligopolistic market because usually the market is already controlled by other well-known companies that already have the customer loyalty and price control advantage . Fixed pricing: Pricing strategies are used in an oligopolistic market but differences in product prices are rarely very far apart. This is because companies in the market agree on a fixed price for the products or services. Fixed prices in markets usually mean that businesses have control over consumers and this causes them to pay more. Fewer Choices: Consumers have limited options for the products and services they want. No fear of competition: Firms in an oligopolistic market are usually not motivated to invent new products or ideas because they control the market with other firms. The Cournot model The Cournot model is an economic model in which the industry producing homogeneous goods (similar products) decides the output of competitors as a fixed output and independently chooses its own output. The Cournot model argues that firms seek to maximize revenues based on the decisions of competitors. Furthermore, it is argued that the production of each firm has an impact on the price of the product. This model was introduced by the French mathematician Augustin Cournot in 1838. The model has its advantages. It shows logical assumptions between low production and high price and high production and low price levels. It also features a Nash equilibrium, which is when each company reacts as best as possible to the actions of its competitor. However, the Cournot model has its drawbacks: sometimes the predictions are unrealistic compared to the real world. The Cournot model shows that businesses can operate like a cartel and earn higher profits if they band together instead of competing with each other. But game theory, which is “the study of human conflict and cooperationwithin a competitive situation”. shows us that such an agreement would not be in equilibrium. Critics have also criticized the model on how companies in the market often compete on quantity rather than price, while the model shows that the strategic point is price rather than quantity. The Prisoner's Dilemma Oligopoly is an example of a "prisoner's dilemma". A "game" that suggests the difficulty of maintaining cooperation when cooperation is mutually beneficial. Although sometimes cooperation would be a better scenario for two firms, this is often not the case for oligopoly because cooperation is not in the interest of the individual actor. An example of a prisoner's dilemma could be the case between Pepsi and Coca-Cola, because the two are highly competitive, a price change by one of them would be seen as a strategic move by the other. This will cause the other firm to also change its price to maintain its market share. Due to the initial price change, both companies may experience reduced profits due to an actor's actions. Oligopolistic Markets in the UK A common example of an oligopolistic market is the chocolate industry, more specifically in the UK chocolates are most likely produced by a single operator. of the three companies; Cadbury, Mars or Nestlé. These three companies make up almost all of the chocolate bars sold in the UK. Together they decide the quantity of chocolates produced and the price at which they are sold, given the demand curve for chocolates. This is a perfect example of oligopoly and its aspects in action. Due to the low competition these companies face, they are price takers. This is known as imperfect competition. Another example of an oligopoly is the UK supermarket industry, which includes Tesco, ASDA, Sainsbury and Morrison's, they are the four largest supermarkets and account for 68% of the food market. You can imagine how difficult it would be for a new company to enter the supermarket sector in the UK. Each area also has two or more supermarkets for customers to choose from. To attract customers, the supermarket industry needs to offer discounts, use different promotion strategies such as loyalty cards, extend opening hours and offer better service quality. These are some of the strategies used not only by the supermarket industry but by oligopolies in general. Oligopoly Cartel Theory A cartel occurs when several firms form a pact to decide on production and pricing decisions. The main goal of a cartel is to increase profits. Game theory shows that cartels are unstable, meaning that each individual cheats for short-term profits. Cartels tend to operate in markets with few firms and each firm holds a large market share, as in oligopoly. The best-known example of an international cartel would be the oil company OPEC. Members often meet to discuss the oil production produced between each member. By forming a cartel, businesses are able to act as a monopolist because together they have the market power to determine production and price. The price is determined by the market demand curve at the production level set by the cartel. Unlike in a perfectly competitive market, cartels often choose to produce less and charge a higher price. The Bent Demand Curve Theory There is no single theory of oligopoly. The bent demand curve is a theory that attempts to explain price rigidity; the phenomenon whereby a price remains unchanged for a period of time in markets.