ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN: 9780190931919
Author: NEWNAN
Publisher: Oxford University Press
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Oligopoly. An oligopoly is less competitive than a market with monopolistic competition. It has only a few sellers who produce either homogeneous or slightly differentiated products. There are steep barriers to entry in an oligopoly. Barriers can be artificial, as in the examples of patents, trademarks, copyrights, or regulation. Barriers can also be natural, as in the case of only a few firms controlling all the available resources that are critical to production. A market can evolve into an oligopoly if a few firms manage to capture economies of scale. An economy of scale is a savings, which results from the size ("scale") of the firm. Large firms can buy raw materials at bulk discount rates, for example. If a small handful of firms become low-cost producers, they will drive highercost producers out of business and create an oligopoly. Potential new entrants may be discouraged by the industry's high start-up cost. The few sellers in an oligopoly are interdependent. An action by one will impact all the others. If one firm tries to raise its price, the firm's market share will be lost to its competitors. Clearly, no firm wants to lose its market share, so no firm will be foolish enough to attempt a price increase. On the other hand, if one firm lowers its price, then the other firms will be forced to lower their prices, too. In the end, each firm will be left with the same market share, but everyone will earn a smaller profit. As it turns out, there is almost no incentive to raise or lower prices in an oligopoly. The firms must engage in non-price competition. To be successful in the long run, the firms in an oligopoly must work at maintaining the market structure. In other words, they have to try to remain in an oligopoly. In a market economy, the strategic behavior of the firms in an oligopoly can be very aggressive. Without regulation, it can quickly become anti- competitive, too. Historically, oligopolistic markets have seen all kinds of now-illegal behavior, all at the hands of firms who aimed to maintain market power. One anti-competitive strategy is collusion. When a few firms collude, they agree to divide the market among themselves, or to fix the market price. In effect, they eliminate the need to compete for business by agreeing not to compete at all. Collusion results in all sorts of inefficient and inequitable problems, including higher prices and lower output. Another anti-competitive strategy is to pressure legislators to create tough, new regulations for any firm that wishes to enter the market. If this strategy is carried out successfully, then the new regulations will be easily met by the existing firms, but nearly impossible for a new entrant to satisfy. As a result, the barriers to entry will be so high that new suppliers cannot enter. This is common in the airline industry. Other oligopolies engage in price leadership: when one firm raises prices, the rest follow. Examples of Oligopolistic Markets steel -automobiles oil breakfast cereal airlines
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Transcribed Image Text:Oligopoly. An oligopoly is less competitive than a market with monopolistic competition. It has only a few sellers who produce either homogeneous or slightly differentiated products. There are steep barriers to entry in an oligopoly. Barriers can be artificial, as in the examples of patents, trademarks, copyrights, or regulation. Barriers can also be natural, as in the case of only a few firms controlling all the available resources that are critical to production. A market can evolve into an oligopoly if a few firms manage to capture economies of scale. An economy of scale is a savings, which results from the size ("scale") of the firm. Large firms can buy raw materials at bulk discount rates, for example. If a small handful of firms become low-cost producers, they will drive highercost producers out of business and create an oligopoly. Potential new entrants may be discouraged by the industry's high start-up cost. The few sellers in an oligopoly are interdependent. An action by one will impact all the others. If one firm tries to raise its price, the firm's market share will be lost to its competitors. Clearly, no firm wants to lose its market share, so no firm will be foolish enough to attempt a price increase. On the other hand, if one firm lowers its price, then the other firms will be forced to lower their prices, too. In the end, each firm will be left with the same market share, but everyone will earn a smaller profit. As it turns out, there is almost no incentive to raise or lower prices in an oligopoly. The firms must engage in non-price competition. To be successful in the long run, the firms in an oligopoly must work at maintaining the market structure. In other words, they have to try to remain in an oligopoly. In a market economy, the strategic behavior of the firms in an oligopoly can be very aggressive. Without regulation, it can quickly become anti- competitive, too. Historically, oligopolistic markets have seen all kinds of now-illegal behavior, all at the hands of firms who aimed to maintain market power. One anti-competitive strategy is collusion. When a few firms collude, they agree to divide the market among themselves, or to fix the market price. In effect, they eliminate the need to compete for business by agreeing not to compete at all. Collusion results in all sorts of inefficient and inequitable problems, including higher prices and lower output. Another anti-competitive strategy is to pressure legislators to create tough, new regulations for any firm that wishes to enter the market. If this strategy is carried out successfully, then the new regulations will be easily met by the existing firms, but nearly impossible for a new entrant to satisfy. As a result, the barriers to entry will be so high that new suppliers cannot enter. This is common in the airline industry. Other oligopolies engage in price leadership: when one firm raises prices, the rest follow. Examples of Oligopolistic Markets steel -automobiles oil breakfast cereal airlines
2.33 IN BRIEF Short answer. Write a brief response to each of the following questions about oligopolies. 1. How many buyers and sellers are there in an oligopoly? 2. How easy or difficult is it for a new seller to enter an oligopoly? 3. How different is one seller's product from the next in an oligopoly? 4. How does a seller in an oligopoly decide upon a sale price? s. What are some ways in which existing firms try to prevent new suppliers from entering an oligopoly?
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Transcribed Image Text:2.33 IN BRIEF Short answer. Write a brief response to each of the following questions about oligopolies. 1. How many buyers and sellers are there in an oligopoly? 2. How easy or difficult is it for a new seller to enter an oligopoly? 3. How different is one seller's product from the next in an oligopoly? 4. How does a seller in an oligopoly decide upon a sale price? s. What are some ways in which existing firms try to prevent new suppliers from entering an oligopoly?
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Step 1: Define oligopoly
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Step 2: Explain number of buyers and sellers
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Step 3: Explain barriers to entry
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Step 4: Explain differentiation in oligopoly
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