Industry market oligopoly. Oligopoly. Characteristic features of the functioning of oligopolies
In economic theory, much attention is paid to problems of market structure. As you know, there are perfect and imperfect competition. If perfect competition is a somewhat idealized model of market structure, then imperfect competition is a completely real one.
Imperfect competition includes oligopoly, monopolistic competition and monopoly. In this work we focused on oligopoly.
An oligopoly is a market situation in which a few large firms dominate an industry.
It is believed that the term “oligopoly” was introduced into economic literature by the English utopian socialist Thomas More (1478-1532). The term comes from two Greek words: oligos - several; roleo - trade.
According to some sources, the term “oligopoly” was introduced into scientific circulation by the English economist E. Chamberlin.
In an oligopolistic market, competing firms use price controls, advertising, and output controls. They behave like armies on the battlefield. The interconnection of oligopolistic firms is manifested in various forms of their behavior from price wars to collusion. In an oligopoly model, a firm has the ability to implement optimal policies taking into account the actions of its competitors.
IN last years The state pays increased attention to problems related to the state of competition, as well as to the suppression of violations of antimonopoly legislation. Antimonopoly legislation has been updated and sanctions for its violation have been significantly tightened.
The urgency of the problem lies in the fact that in conditions Russian economy oligopoly significantly influences the development of the country. This is especially true in modern times of crisis, when there is a redistribution of property, a reduction in market players, and various mergers and acquisitions. The task of the Federal Antimonopoly Service is to prevent the emergence of new monopolistic and oligopolistic structures, secret collusions, price increases, etc.
The object of study in our work is the oligopolistic market.
The subject of the study is the economic relations that arise between subjects of the oligopolistic market, the state and other firms in the field of production, pricing, and sales.
The purpose of our work is to analyze oligopoly models.
To achieve this goal, it is necessary to solve the following tasks:
Consider theoretical basis oligopolies;
Identify the reasons for the formation and differences of oligopoly;
Describe the main theories of oligopoly;
Conduct a comparative description of oligopoly models.
The theoretical basis for writing the course work was the work of Ivashkovsky S.N., Nosova S.S., Gryaznova A.G., Checheleva T.V., M.I. Plotnitsky, I.E. Rudanova. The work also used the journals “Society and Economics”, “Questions of Economics”, as well as Internet sources.
1 THEORETICAL FOUNDATIONS OF OLIGOPOLY
1.1 The essence of oligopoly
Oligopoly is a fairly common, most complex and least predictable structure. A small number of competing firms and a large number of consumers make it possible for oligopolists to explicitly or implicitly coordinate their actions and act as a single monopoly. A feature of an oligopoly is that each manufacturer must make a decision taking into account the possible response from competitors.
The word "oligos" in Greek means little. Oligopoly is the predominant modern market structure. It is characterized by the fact that only a few firms (up to 10-15) produce all or a significant part of the products; there are a large number of consumers on the market.
Oligopoly is a market structure in which there are several sellers and the share of each of them in total sales on the market is so great that a change in the quantity of products offered by each of the sellers leads to a change in price.
Oligopoly is a situation in which the number of firms in the market is so small that each, when forming its own pricing policy must take into account reactions from competitors. An oligopoly can be defined as a market structure in which markets for goods and services are dominated by a relatively small number of firms producing homogeneous or differentiated products.
The number of subjects in an oligopoly may vary. It all depends on the concentration of sales in the hands of one or another company. According to some economists, markets that concentrate from 2 to 24 sellers can be classified as oligopolistic structures. If there are only two sellers in the market, this is a duapoly, a special case of oligopoly. The upper limit is conditionally limited to 24 business entities, since starting from the number 25, the structures are counted monopolistic competition.
Oligopoly has the following features:
The presence of several companies, a small number of manufacturers;
Price control limited by mutual dependence or significant by collusion;
The presence of significant economic and legal barriers to entry into the industry (primarily economies of scale, patents, ownership of raw materials);
Interdependence, which involves retaliatory actions by a competitor, especially when implementing pricing policies;
Not price competition, especially when differentiating prices.
Many of these features are also characteristic of other market structures. Therefore, it is impossible to construct a single model of oligopoly.
An oligopoly can be rigid, where two or three firms dominate the market, or loose, where six or more firms share 70–80% of the market.
From the point of view of the concentration of sellers in the market, oligopolies can be divided into dense and sparse. The first includes such industry structures, where two to eight sellers are represented, the second - more than eight business entities. In the case of a dense oligopoly, various types of collusion are possible regarding the coordinated behavior of sellers in the market due to their limited number. In a sparse oligopoly this is practically impossible.
From the point of view of the characteristics and nature of the products produced, oligopolies are divided into homogeneous and differentiated. The first are associated with the production and supply of standard products (steel, non-ferrous metals, Construction Materials), the latter are formed on the basis of the release of a diverse range of products. They are typical for industries in which it is possible to differentiate the production of goods and services offered.
Oligopoly is more common in industries where large-scale production is more efficient and there are no broad opportunities for differentiation of industry products. This situation is typical for the manufacturing, mining, oil refining, electrical industries, as well as for wholesale trade.
In an oligopoly, there is not just one firm operating in an industry, but a limited number of competitors. Therefore, the industry is not monopolized. By producing differentiated products, firms forming an oligopoly compete with each other using non-price methods, and respond to changes in demand mainly by changing production volume.
The behavior of an oligopoly with respect to price and output varies. Price wars bring prices to their competitive equilibrium levels. To avoid this, oligopolies may enter into secret cartel-type agreements, secret gentlemen's agreements; coordinate your behavior in the market with the behavior of the leader in the industry.
When determining price and production volume, an oligopoly takes into account not only the behavior of consumers (as is done in other market structures), but also the reaction of its competitors. The dependence of each firm's behavior on the reactions of competitors is called an oligopolistic relationship.
The interconnection of oligopoly subjects is especially clearly manifested in pricing policy. If one of the firms reduces the price, the others will immediately react to such an action, because otherwise they will lose customers in the market. Interdependence in actions is a universal property of oligopoly.
Firms are interconnected in terms of determining their sales volumes, volumes of products produced, size of investments, operating costs advertising activities. For example, if a company wants to launch a new product or a new product model, then it makes every effort to advertise this product. But at the same time, the company must understand that it is being watched by other oligopolistic firms. And if advertising campaigns are carried out, competitors will begin to behave similarly. They will also create a similar product or model.
This situation is determined by the fact that all firms understand that the goals, objectives, and decisions of competing companies are determined by the behavior of other firms. And when making decisions, you need to understand this and expect response from your competitor.
At the same time, oligopolistic interdependence is both positive and negative. Oligopolistic firms can join forces in the fight against others, turning into a semblance of a pure monopoly, achieving the complete disappearance of competitors in the market, or they can fight against each other, turning the market into a semblance of a market of perfect competition.
Last option most often implemented in the form of a price war - a gradual reduction in the existing price level in order to oust competitors from the oligopolistic market. If one company has reduced its price, then its competitors, sensing the outflow of customers, will, in turn, also reduce their prices. This process can take place in several stages. But price reductions have their limits: they are possible until prices for all firms are equal to average costs. In this case, the source of economic profit will disappear and a situation close to perfect competition will reign in the market. From such an outcome, consumers naturally remain in an advantageous position, while producers, to one and all, do not receive any benefit. Therefore, most often, competition between firms leads to their making decisions taking into account the possible behavior of their rivals. In this case, each of the firms puts itself in the place of its competitors and analyzes what their reaction would be.
The pricing mechanism in oligopoly has two interrelated features. These are, firstly, the rigidity of prices, which change less frequently than in other market structures, and, secondly, the consistency of the actions of all firms in the field of pricing.
Pricing policy in an oligopoly is carried out using the following basic methods (some economists consider them principles): price competition; secret agreement on price; price leadership; price cap .
Price competition in an oligopoly is restrained. This is due, firstly, to weak hopes of achieving market advantages in comparison with competitors, and secondly, with the risk of starting a price war, which is fraught with negative consequences for all its subjects.
Pricing collusion allows oligopolists to reduce uncertainty, generate economic profits, and prevent new competitors from entering the industry. Oligopolies agree to maximize profits on a limited scale, sometimes even reducing them to zero in order to block the invasion of new commodity producers into the industry.
Price leadership occurs when price increases or decreases by the dominant firm in the oligopoly are supported by all or the majority of companies in the market. In an oligopoly, as a rule, there is a large firm that acts as a price leader. Price changes occur only if there are noticeable deviations in the cost of certain factors of production or changes in the operating conditions of the enterprise or production output.
A price markup (usually a certain percentage) is added to the average total costs production. It is designed to take into account actual or possible competition, financial, economic and market conditions, strategic goals etc. This principle is known as “cost plus”. The cape ensures profit and determines the behavior and actions of the company.
Oligopolies have positive and Negative consequences. The following points can be noted as positive:
Large firms have significant financial opportunities for scientific developments and technical innovations;
The competitive struggle between firms in oligopolies contributes to the development scientific and technological progress.
These positive sides noted I. Schumpeter and J. Galbraith, who argued that large oligopolistic firms are capable of being technically progressive and financing research and development work to achieve high rates of scientific and technological progress.
According to other economists, the advantages of oligopoly are the absence of the destructive force of competition that exists in a free market, lower prices and more high quality products than under monopoly conditions; the difficulty of penetration of outside firms into oligopolistic structures due to economies of scale.
Finally, economists also note the fact that, in general, oligopolistic monopolies necessary for society. They have an exceptional role in accelerating scientific and technological progress, as they are able to finance expensive scientific projects.
The negative aspects of oligopoly boil down to the following:
Oligopolies are not so afraid of competitors, since it is almost impossible to penetrate the industry. Therefore, they are not always in a hurry to introduce new equipment and technologies;
By concluding secret agreements, oligopolies seek to benefit at the expense of buyers (for example, they increase product prices), which reduces the level of satisfaction of people's needs;
Oligopolies hinder scientific and technological progress. Until the profit maximization on previously invested large capital is achieved, they are in no hurry to introduce innovations. This prevents obsolescence of machines, equipment, technologies and products.
1.2 Reasons for the formation And O Differences between oligopoly
The following reasons for the formation of oligopoly are identified:
Possibility in some industries of efficient production only at large enterprises (economies of scale);
Ownership of patents and control over raw materials;
Absorption of weak firms by stronger ones. Such a takeover is carried out on the basis of financial transactions aimed at acquiring the enterprise in whole or in part by purchasing a controlling stake or a significant share of capital;
The effect of a merger, which is usually voluntary. When several companies merge into one, a new company can achieve a number of advantages: the ability to control the market, price, purchase raw materials at lower prices, etc.;
Scientific and technological progress, which is associated with a significant expansion of production in order to realize economies of scale.
The differences on which the model of oligopoly is based as a special type of market structure are few and more realistic compared to the assumptions underlying models such as perfect competition or monopoly.
1. The influence of the concept of product homogeneity. If in the model of perfect competition the homogeneity of products produced (sold) by different economic agents is one of the most important assumptions, and the heterogeneity, or differentiation, of products is the defining assumption in the model of monopolistic competition, then in the case of an oligopoly, products can be both homogeneous and heterogeneous . In the first case, we speak of a classical, or homogeneous, oligopoly, in the second, of a heterogeneous, or differentiated, oligopoly. In theory, it is more convenient to consider a homogeneous oligopoly, but if in reality the industry produces differentiated products (many substitutes), we can, for analytical purposes, consider this set of substitutes as a homogeneous aggregated product.
An oligopoly is called classical (or homogeneous) if firms in an industry produce homogeneous products, and differentiated (or heterogeneous) if firms in an industry produce heterogeneous products.
2. A small number of sellers, who are opposed by many small buyers. This means that buyers in an oligopoly market are price takers; the behavior of an individual does not affect market prices. On the other hand, oligopolists themselves are price seekers; the behavior of each of them has a tangible impact on the prices that rivals can receive for their products.
3. Opportunities for entering the industry (market) vary widely: from completely blocked entry (as in the monopoly model) to relatively free. The ability to regulate entry, as well as the need to take into account the possible reaction of rivals when making decisions, shapes the strategic behavior of oligopolists.
2 Basic theories of oligopoly
The most pronounced form of implementation of cooperative behavior is a cartel, which is an agreement on the parameters of an industry supply. The tendency of firms to coordinate their actions through a formal agreement on the volume of output and price of the product produced by the industry is due to the difficulty of diagnosing the reaction of competitors. The substantive side of the cartel agreement is to limit industry output to a level that ensures that firms in the industry receive monopoly profits, which is achieved by coordinating the output of individual firms to volumes that would collectively ensure the establishment of a monopoly equilibrium.
A cartel is a group of firms united by an agreement on price and division of the market between participants in order to obtain monopoly profits.
Organizationally, a cartel can take different forms. Firms may limit themselves to entering into an agreement on price, aiming to avoid price competition, but leaving the possibility of non-price competition for market share. A more stringent form of cartel is the establishment of production quotas, complemented by control over all types of competitive activity. The cartel can be implemented in the form of a specially created sales organization, which, buying products from individual manufacturers at a negotiated price, will then sell these products taking into account coordination.
If there are two firms in the industry market - A and B, then market equilibrium will be established based on the position of the market demand curve D 0 Tp and the industry demand curve marginal cost production, which are determined by horizontally summing the marginal costs of firms (MC A + MC B). If firms operate in conditions of pure competition, then the industry will be in an equilibrium position at price P k and output volume Q k. At this price, firm A will act on the break-even principle, producing output in volume q A k , and firm B, producing output q, will receive a small profit, the value of which is equal to the area of the dark-colored rectangle. Firms can improve their position if they reduce their total output to the level that maximizes industry profits, that is, for which the equality MR = (MC A + MC B) holds. At volume Q kr and the corresponding price P kr, industry profit will be maximum. However, this outcome is only possible if firms reach an agreement to maintain industry output at the industry profit-maximizing level. Consequently, the main task is to distribute production quotas between firms in such a way that their total output is equal to Q kr. Such quotas are determined based on the intersection of the horizontal line obtained from the intersection of MR = (MC A + MC B) with each firm's marginal cost curve. As a result, the production quota of company A will be q A kr, and the quota of company B will be q B kr. By selling the product at the same price P kr, both firms will improve their position. Firm A will earn an economic profit equal to the area of the shaded rectangle. Firm B will increase its profit, as evidenced by the excess of the area of the shaded rectangle over the area of the dark-colored rectangle.
With a large number of firms and significant differences in the market shares they control, reaching an agreement on price and volume is extremely difficult. The greater the heterogeneity of the product produced by firms in an industry, the weaker the incentives to implement a joint strategy. When industry barriers are low and cannot prevent “outsiders” from entering the market, the cartel agreement loses its meaning, since it can be destroyed at any time as a result of an invasion of the market by an outsider, that is, a company not part of the cartel. If firms have significant excess production capacity, then they are tempted to use this capacity and, therefore, violate the terms of the agreement. When industry demand grows, firms have the opportunity to exercise market power without resorting to cartel agreements. At high rates of scientific and technological progress, the value of a cartel agreement sharply decreases, since firms can easily circumvent it by using the newly opened opportunities for restructuring technology or introducing a new product to the market. The nature of the antimonopoly policy pursued by the state is also significant: the stricter the policy, the less likely it is for cartels to emerge, and vice versa.
Secondly, even if a cartel is formed, the problem of maintaining its stability arises, which is a much more difficult task than its creation. There are many reasons for the instability of cartel agreements. First of all, the target preferences of firms may differ, some of which will focus on achieving short-term goals, while others will pursue long-term goals. All this will form grounds for violation of the cartel agreement. The reasons for instability may be rooted in differences in assessments of the validity of the parameters of a cartel agreement on the part of individual firms. If firms have significant differences in production costs or in the market shares each firm controls, then they will have difficulty agreeing on equilibrium price and quantity. For a firm with a higher level of costs (MC A), it would be optimal to set a price P A at a volume of Q A, while a firm with a lower level of costs (MC B) prefers a lower price P B at a higher volume of output Q B. A similar problem arises in the case of the same costs (MC A = MC B), but with different market shares D A and D B. Firm B considers the optimal price R B, which ensures its profit maximization. However, for firm A, given the demand for its product (D A), such a price is unacceptable, since it leads to an unreasonable reduction in output and profit.
The general conclusion that follows from the above is that the success of a cartel depends on the willingness of its participants to follow the agreements reached, as well as their ability to identify and effectively suppress the actions of violators. Turned into a practical plane, such a requirement can only be met if three conditions are met. The first is that the procedures for monitoring compliance with the agreement are cost-effective, that is, they do not require large expenditures. As such, control prices, territorial or segmental division of the market, or the creation of a common sales company can be used. The second condition is related to the speed of identifying violations, which depends on the availability, reliability and speed of obtaining information: the more firms are included in the cartel, the more differentiated the circle of consumers of the industry product is and the more diverse the contracts used, the more difficult it is to identify violators. The third condition is the effective effectiveness of the sanctions applied to violators, which must exceed the benefits received from violating the agreement. Sanctions can take the form of fines, quota restrictions, and “punishment in kind,” where the cartel sharply reduces the price and expands production to force offenders out of the industry market.
Since the usual practice for modern economies is legislative prohibition and legal
prosecution of cartel agreements, the ability to implement cooperative behavior in this form is extremely difficult. Meanwhile, in an oligopolistic market, firms can coordinate their actions in an implicit form. One form of covert cooperative behavior is price leadership.
Price leadership occurs when a firm operates in an industry market with strategic advantages over its competitors. A firm may have advantages in costs or product quality. The decisive factor, however, is its control of a significant share of the industry market, which provides it with a dominant position. A dominant position in the market allows the leading company, on the one hand, to obtain more complete information about the market, and on the other, to ensure price stability by controlling a significant share of the market supply. The mechanism of the price leadership model is that the leader firm sets the market price for the product, taking into account the existing market parameters and the goals pursued, while other firms in the industry (followers) in their pricing policy prefer to follow the leader, accepting his price as given .
Under conditions of price leadership, market coordination is achieved through the adaptation of firms to the price set by the leader, which acts as a factor that sets the production conditions for all firms in the industry market.
In the absence of a dominant firm in the market, price leadership can be achieved by combining several firms into a group pursuing a coordinated pricing policy.
The implementation of the price leadership model presupposes the presence of certain prerequisites. The leader controls a significant share of the market supply and has significant advantages over followers. It is able to determine the industry demand function and distribution production capacity in branch. At the same time, the essence of oligopolistic interaction in this model is that the price that maximizes the profit of the price leader acts as a factor that sets the conditions for optimizing production for other firms in the industry market. That's why distinctive feature This model of interaction is the sequence of decision-making, and not their simultaneity, as was the case in the previous model.
Knowing the market demand curve D and the supply curve of followers S n =XMC n , the price leader firm determines the demand curve for its product D L as the difference between industry demand and competitors' supply. Since at price ¥ x all industry demand will be covered by competitors, and at price P 2 competitors will not be able to supply and all industry demand will be satisfied by the price leader, then the demand curve for the leader’s products (D L) will take the form of a broken line Pl. By optimizing its output in accordance with the principle of profit maximization MR L = MC L, the price leader will set the price P L at the output volume q L. The price set by the leader is accepted by the followers as the equilibrium price, and each of the follower firms optimizes its output in accordance with this price. At price P L, the total supply of followers will be q Sn, which follows from P L = S n.
The behavior of the leader firm is determined by such factors as the size of the leader's industry share, the difference in the production costs of the leader and followers, the elasticity of demand for the leader's product and the elasticity of supply of followers. The most significant in the above list is the parameter of production costs: the greater the difference in the average costs of the leader and followers, the easier it is for the leader to maintain price discipline. Moreover, the leader's cost advantage can be relative, resulting from economies of scale, or it can be absolute, when the leader uses more effective technology or has access to cheaper resources. Absolute cost advantages allow the leading firm to literally dictate market conditions to its followers.
Suppose, with market demand D, the demand for the leader's product is represented as D L, and its production costs as MC L = AC L. The leading company has absolute advantages in the level of average costs - AC L However, having an absolute advantage in costs, the leader can set a price below the level of the minimum values of the average costs of followers, up to the level of its average costs, for example P 1. At this price, there is no optimal output for the follower firms, since at any level of production they will incur a net loss. Ultimately, followers will be forced out of the market, which in this case is completely monopolized by the leading firm. Having eliminated the competitive environment, the leader captures all market demand and sets a monopoly price P m, which allows him to increase profits by an amount. At the same time, despite the seemingly most favorable outcome for the leading company, such behavior also carries some threats in the long term. By ensuring that the leader receives a monopoly profit, the price Р m simultaneously sharply lowers the industry barrier to entry, creating not only favorable opportunities for competitors to resume their activities in the industry, but also provoking an increase in their supply. A significant expansion of industry supply, while market demand remains unchanged, can lead to such a drop in the price of the industry product, which will not only deprive the leader of profit, but also the very opportunity to conduct business activities due to high fixed costs. It is no coincidence that such behavior of a leading company is called “suicidal.” Therefore, the leading company, regardless of its existing advantages, is more likely to be satisfied with a small, stable profit and will regulate the price level in such a way as to maintain entry barriers at a high level, that is, to pursue a “penetration-limiting” pricing strategy. The competitive strategy of a price leader is to focus on long-term profits by responding aggressively to competitors' challenges in both price and market share. On the contrary, the competitive strategy of firms occupying a subordinate position is to avoid direct confrontation with the leader and use measures (most often of an innovative nature) to which the leader cannot respond. Often the dominant firm does not have the power to impose its price on competitors. But even in this case, it remains a kind of conductor of pricing policy (announces new prices), and then they talk about barometric price leadership. If we evaluate a market model with price leadership from the point of view of economic efficiency, then the result will entirely depend on what is the source of leadership in this market. When the source of dominance is cost advantages, price leadership will provide a more efficient outcome than would be obtained under perfect competition. When price leadership is based on cost advantage, it ensures the achievement of market equilibrium when the volume of industry supply is greater than the competitive one. But when price leadership is based solely on control over the market (the firm has a significant share of the industry supply), the result of the functioning of the market with the price leader will be worse than what it would have been under perfect competition. The peculiarity of oligopolistic interaction is that firms tend to maintain the status quo that has developed in the industry, in every possible way resisting its violation, since it is the equilibrium that has developed in the industry that provides them with the most favorable conditions for earning profits. In this regard, the greatest threat to firms interacting oligopolistically is the penetration of “newcomers” into the industry market. There are several reasons for this. Firstly, the entry of a new company into the market upsets the existing equilibrium, which will inevitably cause increased competition among all participants. Secondly, “newcomers” are not burdened with obligations in relation to the oligopolistic agreement that has developed in the industry market. Thirdly, they may not at all share the strategy developed by the “old” firms, but, on the contrary, behave aggressively. Finally, newcomers may bring with them more advanced technology and an improved product, thereby significantly weakening the competitive position of incumbent firms. Therefore, one of the most important concerns of participants in oligopolistic interaction is the creation of conditions that reduce the likelihood of new firms entering the market, in relation to which industry barriers play a primary role. Industry barriers to entry can be raised in a variety of ways. But the most affordable, and most importantly, the most effective is the price. If barriers to entry are low, firms in the industry can artificially raise them by lowering the market price. For example, by implementing a cooperative strategy, firms in the industry could secure economic profits (shaded rectangle) by producing Qi products at a price of P 3 . However, the presence of economic profit would become an attractive factor for new firms to enter the industry. If the outsider's costs are described as LRAC A, then at price P 3 his entry will become inevitable, since such a price carries profit potential for the firm entering the market. Knowing the level of industry demand (D) and costs (LRAC 0), as well as assessing the level of costs of the applicant for entry, firms operating in the industry can set the market price at the level of the minimum long-term average costs of the outsider, that is, P 2 . In this case, the oligopolists will lose part of the profit (horizontally shaded rectangle) - although they compensate for some of the losses, equal to the area of the vertically shaded rectangle, by increasing their supply to Q 2. But firms can expand supply to Q 3 by setting the price of the product at a level P l corresponding to their minimum long-term average production costs. Such a consensus decision will deprive firms of economic profit (industry economic profit is zero). But at the same time, it will make the penetration of “outsiders” into the industry impossible. And not only due to unprofitable production for the outsider (P 3 It is clear that the decision to choose a price level that blocks entry will depend on two circumstances - the level of the oligopolists’ own costs and the cost potential of “outsiders.” If the costs of the latter are higher than the industry average, then the industry price will be set at a level higher than the minimum production costs of firms operating in the market, but below the minimum costs with which firms threatening to enter the market can produce. Even if the price is set at the level of minimum long-run average cost, firms in the industry will earn an accounting profit. Most often, firms prefer the stability of profit to its rate, which means that their decisions will gravitate toward setting prices at a level that is guaranteed to prevent other firms from entering the market. 2.2
Models of non-cooperative behavior: “price war” and competitive cooperation - Responsive Interaction Implementing cooperative strategies in practice is difficult and sometimes impossible. This is due both to fears of being subject to sanctions from the state (heavy fines and long prison terms) for violating antitrust laws, and to the peculiarities of the state of the industry market. Therefore, the presence of competitive rivalry in oligopolistic markets is a fairly common occurrence. However, even in this case, that is, in the absence of cooperative behavior, the nature of competitive interaction under oligopoly conditions has its own characteristics. Their essence is that each company builds its competitive strategy taking into account the one that its competitors implement. In other words, a firm's competitive behavior becomes a form of response to the decisions of other firms operating in the industry market. In this regard, it is extremely important to choose a parameter that is accepted by firms as an object of response, that is, that strategic variable that is accepted by firms as an initial premise when making decisions and, in this sense, plays the role of an anchor in maintaining market equilibrium. Typically, this parameter is price or output volume. When price plays this role, price oligopoly will occur, and when output volume, quantity oligopoly will occur. Since interaction based on response is an extremely complex process for formal analysis, we will somewhat simplify the problem by taking a duopoly as a model of an oligopolistic market, that is, an industry market in which two firms operate. The Cournot model assumes that there are only two firms in the market and each firm takes its competitor's price and output unchanged and then makes its decision. Each of the two sellers assumes that its competitor will always keep its output stable. The model assumes that sellers do not learn about their mistakes. In fact, these sellers' assumptions about the competitor's reaction will obviously change when they learn about their previous mistakes. Let us assume that there are two firms operating in the market: X and Y. How will firm X determine the price and volume of production? In addition to costs, they depend on demand, and demand, in turn, on how many products firm Y will produce. However, what firm Y will do is unknown to firm X; it can only assume possible options for its actions and plan its own production accordingly. Since market demand is a given value, the expansion of production by a firm will cause a reduction in demand for the products of firm X. Figure 1.1 shows how the demand schedule for the products of firm X will shift (it will shift to the left) if firm Y begins to expand sales. The price and production volume set by firm X based on the equality of marginal revenue and marginal costs will decrease, respectively, from P0 to P1, P2 and from Q0 to Q1,Q2. Fig 1.1 Cournot model. Changes in price and production volume by firm X when expanding production by firm Y: D - demand; MR - marginal revenue; MC - marginal cost If we consider the situation from the position of company Y, then we can draw a similar graph reflecting the change in the price and quantity of its products depending on the actions taken by company X. Combining both graphs, we obtain the reaction curves of both firms to each other’s behavior. In Fig. 1.2, curve X reflects the reaction of the company of the same name to changes in the production of firm Y, and curve Y - accordingly, vice versa. Equilibrium occurs at the point of intersection of the reaction curves of both firms. At this point, firms' assumptions match their actual actions. Rice. 1.2 - Reaction curves of firms X and Y to each other’s behavior The Cournot model does not reflect one essential circumstance. It is assumed that competitors will react to a firm's price change in a certain way. When firm Y enters the market and takes away some of the consumer demand from firm Y, the latter “gives up” and enters the price game, reducing prices and production volume. However, firm X can take an active position and, by significantly reducing the price, prevent firm Y from entering the market. Such actions of the firm are not covered by the Cournot model. Many economists considered the Cournot model to be naive for the following reasons. The model assumes that duopolists do not draw any conclusions from the fallacy of their assumptions about how competitors will react. The model is closed, i.e. the number of firms is limited and does not change in the process of moving towards equilibrium. The model says nothing about the possible duration of this movement. Finally, the assumption of zero transaction costs seems unrealistic. Equilibrium in the Cournot model can be depicted through response curves showing the profit-maximizing levels of output that will be produced by one firm, given the output levels of a competitor. Response curve I represents the profit-maximizing output of the first firm as a function of the output of the second. Response curve II represents the profit-maximizing output of the second firm as a function of the output of the first. Response curves can be used to show how equilibrium is established. Following the arrows drawn from one curve to the next, starting with output q1 = 12,000, will result in a Cournot equilibrium at point E, at which each firm produces 8,000 units. At point E, two response curves intersect. This is the Cournot equilibrium. Bertrand's duopolists are similar to Cournot's duopolists in everything, the only difference is their behavior. Bertrand duopolists assume that the prices set by each other are independent of their own pricing decisions. In other words, it is not the opponent’s output, but the price he sets that is a parameter, a constant, for the duopolist. In order to better understand the difference between the Bertrand model and the Cournot model, let us also present it in terms of isoprofit and response curves. Due to the change in the controlled variable (from output to price), both isoprofits and response curves are plotted in the two-dimensional space of prices rather than outputs. Their economic meaning is also changing. Here, the isoprofit, or equal profit curve, of duopolist 1 ≈ is the set of points in the price space (P 1, P 2) corresponding to combinations of prices P 1 and P 2 that provide this duopolist with the same amount of profit. Accordingly, the isoprofit of duopolist 2 ≈ is a set of points in the same price space corresponding to combinations (ratios) of prices Z 1 and P 2, providing the same profit to duopolist 2. Thus, for any change in the price of duopolist 2, there is a single price for duopolist 1 that maximizes its profit. This profit-maximizing price is determined by the lowest point of the highest isoprofit of duopolist 1. Such points shift to the right as we move to higher isoprofits. This means that by increasing its profit, duopolist 1 does this by attracting buyers of duopolist 2, who increases its price, even if duopolist 1 also increases its price. By connecting the lowest lying points of all successively located isoprofits, we obtain the response curve of duopolist 1 to price changes by duopolist 2 ≈ R 1 (P 2). The abscissas of the points of this curve represent the profits that maximize the prices of duopolist 1 at the prices of duopolist 2 given by the ordinates of these points. Now, knowing the response curves of Bertrand duopolists, we can define the Bertrand equilibrium as a different (compared to the Cournot equilibrium) special case of the Nash equilibrium, when the strategy of each enterprise is not to choose its output volume, as in the case of the Cournot equilibrium, but to choose the price level at which he intends to sell his output. Graphically, the Bertrand ≈ Nash equilibrium, like the Cournot ≈ Nash equilibrium, is determined by the intersection of the reaction curves of both duopolists, but not in the output space (as in the Cournot model), but in the price space. Bertrand equilibrium is achieved if the duopolists' assumptions about each other's price behavior come true. If duopolist 1 believes that his rival will set the price P 1 2 , he will choose, according to his response curve, the price P 1 1 in order to maximize profits. But in this case, duopolist 2 can actually set a price P 2 2 for its output based on its response curve. If we assume (as we did when considering the Cournot equilibrium) that the response curve of duopolist 1 is steeper than the corresponding curve of duopolist 2, then this iterative process will lead the duopolists to the Bertrand ≈ Nash equilibrium, where their response curves intersect. The route of their convergence to point B≈N will be similar to the route of convergence of releases of Cournot duopolists. Since the products of both duopolists are homogeneous, each of them will prefer the same level of its price in equilibrium. Otherwise, the duopolist who charges the lower price will capture the entire market. Therefore, the Bertrand-Nash equilibrium is characterized by a single price, which belongs in a two-dimensional price space to a ray emanating from the origin at an angle of 45. In addition, in the Bertrand-Nash equilibrium, the equilibrium price will be equal to the marginal cost of each of the duopolists. Otherwise, duopolists, each guided by the desire to capture the entire market, will lower their prices, and this desire of theirs can be paralyzed only when they equalize their prices not only among themselves, but also with marginal costs. Naturally, in this case the total industry profit will be zero. Thus, despite the exceptionally small number of sellers (there are only two of them in a duopoly), Bertrand's model predicts, in fact, a perfectly competitive equilibrium of an industry structured as a duopoly. Let, as in the Cournot model, market demand be represented by a linear function P = a - bQ, where Q = q 1 + q 2. Then the inverse demand function will be Q = q 1 + q 2 = (a/b) √ (1/b)P. If, at a given price for duopolist 1, P 1 > MC, duopolist 2 sets the price Z 2 > MC, the residual demand of duopolist 1 will depend on the ratio of prices P 1 and P 2 . Namely, when P 1 > P 2 , q 1 = 0, all buyers attracted by a lower price will go to duopolist 2. On the contrary, when P 1< P 2
весь рыночный спрос окажется захваченным дуополистом 1. Наконец, в случае равенства цен обоих дуополистов, P 1
= P 2
, рыночный спрос окажется поделенным между ними поровну и составит (а/b - 1/b P)0,5 для каждого. The demand function of duopolist 1 is displayed as having a discontinuity (AB) in the demand curve DP 2 ABD". If duopolist 2 sets the price P 2, then the demand for the products of duopolist 1 will be zero, which corresponds to the vertical segment (DP 2) of its demand curve. At P 1 = P 2 the market will be divided equally (segment P 2 A will belong to duopolist 1, and segment AB will belong to duopolist 2). Finally, if duopolist 1 responds to P 2 by reducing its price below this level, it will capture the entire market (segment BD"). Each of the duopolistic enterprises can remain profitable, gradually reducing the price in order to increase its share of market demand until the equality P 1 = P 2 = MC is achieved, which characterizes the Bertrand-Nash equilibrium state. Thus, unlike the Cournot model, which predicts the achievement of a perfectly competitive outcome only as the number of oligopolists increases, namely when n/(n + 1) approaches one, the Bertrand model predicts a perfectly competitive outcome immediately upon the transition from a monopoly of one seller to duopoly. The reason for this radically different conclusion is that each Cournot duopolist faces a downward-sloping residual demand curve, whereas a Bertrand duopolist faces a demand curve perfectly elastic to its rival's price, so that lowering the price is profitable as long as it remains above marginal cost. After studying the Cournot and Bertrand models, which predict significantly different outcomes for n = 2, you will naturally ask whose model is “better”, “more correct”, in a word, which one should be used when analyzing oligopoly. Before we try to answer it, let's think about this. Not only are the duopolists of Cournot and Bertrand “naive” and unable to correct their behavior under the influence of experience or, as is often said, incapable of “learning by doing,” they are endowed with another, convenient for building a model, but very unrealistic, property ≈ their production capacity is literally “dimensionless” and capable of contracting and expanding like rubber. After all, duopolists can, without incurring any additional costs, freely vary the volume of their output from zero to a value equal to the entire market demand. At the same time, their marginal and average costs remain unchanged, and there are no economies of scale. F. Edgeworth proposed introducing a power limitation into the Bertrand model. A clear illustration of the mechanism of price competition in an oligopoly can be seen in the kinked demand curve model, also known as the Sweezy model, named after the American economist P.M. who proposed it in 1939. Sweezy (1910-2004). The broken demand curve model is based on the assumption of the peculiarities of response in conditions of oligopolistic interaction. The essence of the assumption is that competitors will always respond to a company's price reduction by responding with an adequate reduction in the price of their product, but will not respond to a price increase by the company, leaving their prices unchanged. Moreover, a certain degree of differentiation of the product of firms is allowed, which, however, does not prevent the high elasticity of substitution of products from different firms. Rice. 2.1 Curved demand curve model: D1,MR1 - demand curves and the firm's marginal revenue at prices above P0; D2 MR2 - demand curves and marginal revenue of the firm at prices below P0 Since the principle considered applies to all firms operating in the industry market, the industry demand curve will have the same form. The peculiarity of the demand curve is that it has an inflection point E, which is the point of equilibrium market price, which, in turn, determines the optimal output volume of individual firms. However, as we already know, in the case of a broken demand curve, the marginal revenue line also becomes a broken line MR d. The main feature is that a discontinuity ST appears at the marginal revenue line, which makes it sharply different from the marginal revenue curves for perfect and monopolistic competition, as well as monopoly. This gap will be greater the fewer firms operate on the market, the more similar in production capacity they are, the more standardized their product and the closer the interaction between them. If firms are guided in their behavior by profit maximization (MR=MC), then even if marginal production costs change in the ST range, for example, if they increase from MC X to MC 2, the firm will not change the volume of output q*. Being wary of a price increase due to the threat of a reduction in market share, as well as its decrease due to the reaction of competitors, the firm will prefer to keep the price at the level of the existing equilibrium market price P*. Simply put, by expecting a very specific type of response to their actions, each firm will not seek to use price as a means to gain a competitive advantage, preferring to keep it constant even if production costs rise. Oligopolistic interaction encourages firms to maintain market price stability. In conclusion, we can note a number of features of the functioning of an oligopolistic market. Firstly, its participants will refrain from unmotivated price changes. Secondly, sell at the same or comparable prices. Thirdly, in an oligopoly there are factors that determine the stability (rigidity) of market prices. 2.3 Comparative characteristics of models Of course, price stability is an important condition for extracting economic profits and undoubtedly meets the interests of oligopolists. However, practice does not confirm such unambiguity. This is apparently due to the fact that competing firms do not always regard price reductions as an attack on their market shares. Therefore, their response is not as unambiguous as assumed in the model. In addition, when faced with similar problems (declining demand, rising costs), firms may follow the pioneer's initiative. The weakness of the model is that, while explaining price stability, it does not reveal the mechanism of formation of the initial equilibrium, that is, it does not say anything about how the market moves to the inflection point. The choice of a model for interaction between firms in an industry market depends on many factors. First of all, from those that have a decisive influence on competitive conditions. And yet, a certain typology of the choice of behavior model by firms can be given. Experimental modeling showed that, firstly, the choice of behavior model of firms depends on their number. In a duopoly, collusion becomes almost inevitable. Interactions in a model with a limited number of participants most often end in results close to the Cournot equilibrium. Secondly, the criterion used by the owner to reward company managers plays a significant role in the choice of behavior model. When contractual relations provide for the application of penalties by the owner for increasing sales volumes, a model of interaction between firms will be formed that differs as much as possible from the Bertrand model, and sales volumes will be selected taking into account the maintenance of specified prices and profits. If sales volume is taken as a criterion for evaluating the work and rewarding top management, then firms will be inclined to the Bertrand model of interaction. Moreover, even those firms where the incentive system is built on the basis of other criteria will be involved in such a model of interaction. Quantitative oligopoly models (Cournot, cartel) will dominate in those industry markets where there are production restrictions. In capital-intensive industries that require large investments and time to change production capacity, it is difficult to vary the volume of output. Therefore, in industries that produce industrial products, firms will prefer to compete on price rather than volume. Price oligopoly (Bertrand model, price leadership) is most likely to be present where barriers to price adjustment exist. In the case of consumer goods, changing the price is not as simple a matter as it might seem. Concluding long-term supply contracts and fixing prices in the eyes of consumers (catalogs, price lists) impose serious restrictions on pricing, and the response of firms is more likely to be expressed in volume adjustments. We can say that industries with a long production cycle will be characterized by price adjustments, while industries with a short production cycle will be characterized by adjustments in output. If we evaluate models of oligopolistic interaction by their efficiency, then with a certain degree of convention we can say that the least effective among them will be the cartel, and the most effective will be the interaction in the Bertrand model. In our course work, we tried to consider the theoretical features of the functioning of such a market structure as an oligopoly. An oligopoly is a situation where there are a small number of firms in a market that control a large portion of the market. In particular, oligopoly, we examined its main features in the first chapter of our work. The main features of oligopoly include: a small number of firms, barriers to entry into the market, price control, non-price competition, and interdependence of producers. In the economic literature there are many criteria by which oligopolies are classified. For example, based on the nature of the products produced, a distinction is made between homogeneous and differentiated oligopolies. Oligopolies are characterized by interdependence. The interconnection of oligopoly subjects is especially clearly manifested in pricing policy. If one of the firms reduces the price, the others will immediately react to such an action, because otherwise they will lose customers in the market. Interdependence in actions is a universal property of oligopoly. Oligopolistic firms mainly use non-price competition methods. There is evidence that in many oligopolistic industries prices have remained stable over long periods of time. Firms operating within an oligopolistic market structure strive to create a system of connections that would allow them to coordinate behavior in the common interest. One form of such coordination is so-called price leadership. It consists in the fact that changes in reference prices are explained by a certain company, which is recognized as the leader by all others that follow it in the pricing policy. There are three types of price leadership: dominant firm leadership, collusion leadership, and barometric leadership. Dominant firm leadership is a market situation in which one firm controls at least 50% of production and the remaining firms are too small to influence prices through individual pricing decisions. A leadership conspiracy involves the collective leadership of several of the largest firms in a given industry, taking into account each other's interests. Price leaders must decide whether to announce price changes that are favorable only to them, or to set a price level that will mitigate the contradictions between all firms operating in the industry. Barometric price leadership, unlike the previous type of price leadership, is a more amorphous and uncertain structure; it often does not ensure the achievement of high price levels. There is often a change in leadership. He is not always followed due to his lack of ability to force other participants to act together. They advertise reference prices, but the actual prices charged by other firms differ from those advertised. Oligopolistic pricing theory explains why firms avoid price competition when competing for markets. By raising the price, the manufacturer loses part of the market to its rival; By lowering the price, he causes counteractions and again gains nothing. Therefore, the oligopolist uses methods that rivals cannot reproduce quickly and completely. A firm's market share is largely determined by nonprice competition. This involves improving the quality of goods, their differentiation, the use of advertising, improving after-sales service, and providing loans. The competition model is becoming more complex, and its methods are becoming more diverse. To summarize, despite some disadvantages of oligopoly, such as using market power to limit competition and increasing prices, oligopoly has many advantages and is one of the most common market structures in modern economies. BIBLIOGRAPHY 1. Bakanov, M. I., Shemet, A. D. Theory of economic analysis. – M.: PrintInvest, 2007 2. Borisov, E. F. Economic theory. – St. Petersburg: PeterPress, 2008 3. Voitov, A. G. Economics. General course. - M.: Eksmo, 2009 4. Volkonsky V.A., Koryagina T.I. On the role of oligopoly in the modern economy // Banking. - 2009 5. Dusushe O.M. Static Cournot-Nash equilibrium and reflexive games of oligopoly // Economic Journal of Higher School of Economics. - 2008. - No. 1. - P. 5. 6. Course of economic theory / Under general. ed. M. N. Chepurina, E. A. Kiseleva. – M.: RUDN University, 2008 7. Koterova N.P. Microeconomics: Textbook. manual.- M.: ACADEMIA, 2009 8. Levina E.A. Microeconomics: problems and solutions. 3rd ed. – M.: State University Higher School of Economics, 2009 9. Microeconomics. Theory and Russian practice. 8th ed., erased. //Ed. Gryaznova A.G., Yudanova A.Yu. – M.: KnoRus, 2010 10. Microeconomics. Ivashkovsky S.N. - 3rd ed., revised - M.: Delo, 2002.- P. 270. 11. Microeconomics. Maksimova V.F. - M.: EAOI, 2009.- P. 114-115. 12. Microeconomics. Tarasevich L.S., Grebennikov P.I., Leussky A.I. - 4th ed., revised. and additional - M.: Yurait-Izdat, 2006.- P. 149. 13. Novikova I.V. Microeconomics. Textbook for universities - M.: Tetrasystems, 2010 14. Taranukha, Yu.V. Microeconomics: textbook / Yu.V. Taranukha; under general ed. prof. A.V. Sidorovich. – M.: “Business and Service”, 2009 15. “Mergers, acquisitions and restructuring of companies” Gokhan P. - M: Alpina Business Books Publishing House - 2007 16. Polotnitsky, M. I. Microeconomics course. M.: PrintM, 2009 17. Salimzhanov, I. K. Pricing. – Mn.: BelPt, 2008 18. Pindyck, R., Rebinfeld, D. Microeconomics. Mn.: BSEU, 2009 19. “Economic Theory” - 4th edition by A.I. Popov - St. Petersburg: Publishing house PITER, 2009 20. Hyman, D. N. Modern microeconomics: analysis and application. – M.: MSU, 2008 A market economy is a complex and dynamic system, with many connections between sellers, buyers and other participants in business relationships. Therefore, markets by definition cannot be homogeneous. They differ in a number of parameters: the number and size of firms operating in the market, the degree of their influence on the price, the type of goods offered, and much more. These characteristics determine types of market structures or otherwise market models. Today it is customary to distinguish four main types of market structures: pure or perfect competition, monopolistic competition, oligopoly and pure (absolute) monopoly. Let's look at them in more detail. Market structure– a combination of characteristic industry characteristics of market organization. Each type of market structure has a number of characteristic features that affect how the price level is formed, how sellers interact in the market, etc. In addition, types of market structures have varying degrees of competition. Key characteristics of types of market structures: The most important characteristic of the type of market structure is level of competition, that is, the ability of an individual selling company to influence the overall market conditions. The more competitive the market, the lower this opportunity. Competition itself can be both price (price changes) and non-price (changes in the quality of goods, design, service, advertising). You can select 4 Main Types of Market Structures or market models, which are presented below in descending order of level of competition: A table with a comparative analysis of the main types of market structures is shown below. Perfectly competitive market (English "perfect competition") – characterized by the presence of many sellers offering a homogeneous product, with free pricing. That is, there are many companies on the market offering homogeneous products, and each selling company, by itself, cannot influence the market price of these products. In practice, and even on the scale of the entire national economy, perfect competition is extremely rare. In the 19th century it was typical for developed countries, but in our time only agricultural markets, stock exchanges or the international currency market (Forex) can be classified as perfectly competitive markets (and then with a reservation). In such markets, fairly homogeneous goods are sold and bought (currency, stocks, bonds, grain), and there are a lot of sellers. Features or conditions of perfect competition: Market of monopolistic competition (English "monopolistic competition") – characterized by a large number of sellers offering a variety of (differentiated) products. In conditions of monopolistic competition, entry into the market is fairly free; there are barriers, but they are relatively easy to overcome. For example, in order to enter the market, a company may need to obtain a special license, patent, etc. The control of selling firms over firms is limited. Demand for goods is highly elastic. An example of monopolistic competition is the cosmetics market. For example, if consumers prefer Avon cosmetics, they are willing to pay more for them than for similar cosmetics from other companies. But if the price difference is too large, consumers will still switch to cheaper analogues, for example, Oriflame. Monopolistic competition includes the food and light industry markets, the market of medicines, clothing, footwear, and perfumes. Products in such markets are differentiated - the same product (for example, a multicooker) from different sellers (manufacturers) can have many differences. Differences can manifest themselves not only in quality (reliability, design, number of functions, etc.), but also in service: availability of warranty repairs, free delivery, technical support, installment payment. Features or features of monopolistic competition: Oligopoly market (English "oligopoly") - characterized by the presence on the market of a small number of large sellers, whose goods can be either homogeneous or differentiated. Entry into an oligopolistic market is difficult and entry barriers are very high. Individual companies have limited control over prices. Examples of oligopoly include the automobile market, markets for cellular communications, household appliances, and metals. The peculiarity of oligopoly is that the decisions of companies on prices for goods and the volume of its supply are interdependent. The market situation strongly depends on how companies react when one of the market participants changes the price of their products. Possible two types of reaction:
1) follow reaction– other oligopolists agree with the new price and set prices for their goods at the same level (follow the initiator of the price change); 2) reaction of ignoring– other oligopolists ignore price changes by the initiating firm and maintain the same price level for their products. Thus, an oligopoly market is characterized by a broken demand curve. Features or oligopoly conditions: Pure monopoly market (English "monopoly") – characterized by the presence on the market of one single seller of a unique (without close substitutes) product. Absolute or pure monopoly is the exact opposite of perfect competition. A monopoly is a market with one seller. There is no competition. The monopolist has full market power: it sets and controls prices, decides what volume of goods to offer to the market. In a monopoly, the industry is essentially represented by just one firm. Barriers to entry into the market (both artificial and natural) are almost insurmountable. The legislation of many countries (including Russia) combats monopolistic activities and unfair competition (collusion between firms in setting prices). A pure monopoly, especially on a national scale, is a very, very rare phenomenon. Examples include small settlements (villages, towns, small cities), where there is only one store, one owner of public transport, one railway, one airport. Or a natural monopoly. Special varieties or types of monopoly: Features or monopoly conditions: Galyautdinov R.R. © Copying of material is permissible only if a direct hyperlink to Since there are a small number of firms in the market, sellers need to develop development strategies for their firm so that they are not forced out of the market by competitors. Since there are few firms on the market, companies closely monitor the actions of competitors, including their pricing policy, with whom they collaborate, etc. Broken demand curve model: point P (no) - if a firm sets the price for a product above a given level, then competitors will not follow it The pricing policy of an oligopolist company plays a huge role in its life. As a rule, it is not profitable for a firm to raise prices for its goods and services, since there is a high probability that other firms will not follow the first one, and consumers will “move” to a rival company. If a company lowers prices for its products, then, in order not to lose customers, competitors usually follow the company that lowered prices, also reducing prices for the goods they offer: a “race for the leader” occurs. Thus, so-called price wars often occur between oligopolists, in which firms set a price for their products that is no higher than that of the leading competitor. Price wars can often be devastating for companies, especially those competing with more powerful and larger firms. Some oligopolists act according to the principle “don’t have a hundred rubles, but have a hundred friends.” Thus, firms enter into cooperation with competitors, such as alliances, mergers, conspiracies, cartels. For example, the airline oligopolist Aeroflot entered into the Sky Team alliance with other global airlines in 2006, and oil-producing countries united in OPEC, often recognized as a cartel. An example of a merger of two companies is the merger of Air France and KLM airlines. By joining together, firms become more powerful in the market, which allows them to increase their output, change the prices of their goods more freely, and maximize their profits. To model the behavior of market participant firms in the theory of oligopoly, game theory methods are used. The most famous oligopoly models are: In the vast majority of countries in the world, the processes of business combinations are controlled by antitrust legislation. Wikimedia Foundation. 2010. A market situation in which a small number of fairly large sellers opposes a mass of relatively small buyers and each seller accounts for a significant part of the total supply on the market. Dictionary of financial terms... ... Financial Dictionary - (oligopoly) A market in which a relatively small number of sellers serve many buyers. Every seller realizes that he can control his prices to a certain level and that his profits will be affected by the behavior of his competitors... Dictionary of business terms - (oligopoly) A situation in a market where there are several sellers, each of whom evaluates the behavior of others. Each firm controls a fairly significant part of the market, taking into account the individual reaction of other market participants to their reduction... ... Economic dictionary - [Dictionary of foreign words of the Russian language oligopoly- The state of the product market in which there is a very limited number of operators, as a rule, large corporations. Automotive markets are practically oligopolistic in all countries, since the number of car manufacturers is very... ... Technical Translator's Guide - (from oligo... and Greek poleo I sell, trade), type market structure economy, in which several large firms and companies provide the overwhelming share of industry production and sales of products... Modern encyclopedia - (from oligo... and Greek poleo sell trade), a term denoting a market situation when several large competing firms monopolize the production and sales of the bulk of products in the industry... Big Encyclopedic Dictionary - (from the Greek oligos small and poleo I sell) English. oligopoly; German Oligopol. A type of market structure in which several large competing firms monopolize the sale of the bulk of products in a given industry. see MONOPOLY. Antinazi. Encyclopedia... Encyclopedia of Sociology ⚡ Oligopoly ⚡- a form of market when several enterprises producing similar products operate. Another definition of an oligopolistic market could be a Herfindahl index value greater than 2000. An oligopoly of two participants is called a duopoly. Examples of oligopolies include manufacturers of passenger aircraft, such as Boeing or Airbus, and car manufacturers, such as Mercedes and BMW. In the Republic of Belarus there are 4 sugar factories and 3 factories producing chemical fiber. Homogeneous products are products that do not differ in the variety of types, grades, sizes, brands (alcohol - 3 grades, sugar - about 8 grades, aluminum - about 9 grades). Heterogeneous products are products characterized by a wide variety of types, grades, sizes, brands. Example: in the Republic of Belarus the ceramic tile market is dominated by JSC “Kiramine”, producing more than 75% of these products. Example: in the Republic of Belarus there are two factories producing televisions - Vityaz and Horizont, they act in everything by imitating each other. Oligopoly– a market in which there are several firms, each of which controls a significant market share (from the Greek “oligos” - little, little). This is the predominant form of modern market structure. Signs of oligopoly: 1. The presence of several large firms on the market (from 3 to 15 – 20). 2. The products of these companies can be both homogeneous (the market for raw materials and semi-finished products) and differentiated (the market for consumer goods). Accordingly, pure and differentiated oligopolies are divided. 3. Carrying out an independent pricing policy, however, control over prices is limited by the mutual dependence of firms and is to some extent implemented by concluding agreements between them. 4. Significant restrictions on entering the market associated with the need for significant capital investments to create an enterprise in connection with the large-scale production of oligopolistic firms. In addition, there are barriers characteristic of a monopoly - patents, licenses, etc. Important feature Such a market is also the fact that firms can take a number of actions (relative to sales volumes and prices of goods) aimed at preventing potential competitors from entering the market. 5. The inexpediency of price competition and the advantage of non-price competition, successful solutions in which can provide market advantages for some time. 6. Dependence of the strategic behavior of each company (determination of price and output volumes, beginning advertising campaign, making investments in expanding production) from the reaction and behavior of competitors, which affects market equilibrium. In general, an oligopoly occupies an intermediate position between a monopoly and perfect competition(the equilibrium price in the oligopoly market is lower than the monopoly price, but higher than the competitive price). There are many variants of oligopoly: an industry can have either 2-4 leading firms (hard oligopoly) or 10-20 (soft oligopoly). The mechanisms of interaction between firms in these conditions will vary. Overall interdependence makes it difficult to anticipate the appropriate response of a competitor and makes it impossible to calculate demand and marginal revenue for the oligopolist. Oligopolistic behavior presupposes the presence incentives for concerted action in setting prices. The significant size of firms does not contribute to their market mobility, so the greatest benefits come from collusion between firms in order to maintain prices, limit output and jointly maximize profits. Collusion is an explicit or tacit agreement between firms in an industry to establish fixed prices and output levels or to limit competition between them. Collusion is most likely if it is legal and there are a small number of firms. Differences between firms in products, costs, volume of demand, and the ability to reduce prices secretly from others make collusion difficult. If several firms in an oligopolistic market are approximately the same in size and level of average costs, then the price level and volume of production that maximize profit will coincide for them. A joint pricing policy will actually turn an oligopolistic market into a pure monopoly. All this pushes oligopolists to the conclusion cartel agreements. If the collusion is legal, producers of identical products often enter into an agreement to divide the market, and a group of such firms forms cartel. Such an agreement establishes for all its participants their shares in the volume of production and sales, prices for goods, and terms of employment. work force, patent exchange. Its goal is to increase prices above the competitive level, but not to limit the production and marketing activities of participants. From here the main problem of the cartel- this is the coordination of decisions of its participants regarding the establishment of a system of restrictions (quotas) for each company. Question 22. Determination of price and production volume in an oligopoly. Pricing models in oligopoly conditions General theory There is no pricing in an oligopoly. There are a number of models that explain the market behavior of an oligopoly depending on what assumptions the firm has about how its competitors will react. A specific market model for an oligopolist is shown in Fig. 1. Rice. 1. Broken line of demand Broken demand curve model(R. Hall, Hitch, P.-M. Sweezy, 1939) explains why an oligopoly firm is reluctant to abandon its price-output decision, due to which prices in an oligopoly have a certain stability in short term with some change in the value of costs (which cannot be said about a perfectly competitive market). Let us assume that there are three firms x, y and z operating in the market. The market price was established at the level of R o. Let's consider how firms y and z will react to a price change by firm x. If firm x raises its price above the P o level, then firms y and z most likely will not follow it and will leave prices at the P o level. As a result, firm x will lose customers, and firms y and z will expand their share of the market. Thus, increasing the price is not beneficial for firm x; The demand for its products in the VA sector is quite elastic. If firm x reduces its price to increase sales, competitors are likely to respond with similar reductions to protect their market share. Therefore, firm x will not receive a significant increase in demand (demand in area AD is relatively inelastic). As a result of different reactions of competitors to price changes, the demand curve will take the form BAD. Both of the most likely options for the consequences of a price change do not bring a significant positive result to the company (a price reduction means an insignificant increase in sales, a price increase means a reduction in sales). Consequently, we can assume that prices in such a market will be stable (firms pursue a policy of “price rigidity”). This assumption can be confirmed as follows. The bend in the demand curve at point A corresponds to a break in the line MR, which in Fig. 1 is represented by the broken line BCEF. If the MC curve intersects it on the CE segment (all points of which correspond to the Cournot point by definition), the firm has no reason to refuse the price P o (i.e., a change in MC, expressed in the intersection of several MC curves with the CE segment, will not cause a change in price) . Some increase in costs does not lead to a change in price until the MC curve rises above point C. If there is an increase in demand for this product, then the BAD demand line will shift upward to the right, and along with it the MR line, including its vertical section, will shift to the right. Taking into account the intersection of the MC line with the MR line on its vertical section, then optimal price for the oligopolist, the price will remain the same, although the optimal output volume increases. Thus, even if the demand for a product changes, the oligopolist is not inclined to change the price, but at the same time changes the volume of production. As a result, using this model we can formulate Cournot equilibrium: Neither firm is interested in changing the price of its product unless its competitor changes the price of its product. This is due to the fact that once a firm changes its original price, in an oligopoly it will no longer be able to return to it. As a result, in an oligopoly, equilibrium can be established at a price corresponding to the monopoly price. However, this outcome is less likely as the number of competitors in an industry increases: the likelihood that someone might lower the price of their product increases, upsetting the market equilibrium. The kinked demand curve model has two disadvantages: 1) it is not explained why the current price was exactly P o; it is also impossible to explain how this price was initially established (i.e., the model does not explain the principles of oligopolistic pricing); 2) as economic practice shows, prices are not as inflexible as follows from this demand curve: under oligopoly conditions they have a clear tendency to increase. All oligopoly models have common features, which can be seen in duopoly models(Antoine Cournot, 1838). Duopoly- a special case of oligopoly, where two producers of homogeneous products participate, each of which is able to satisfy all effective demand in a given market. This structure is often found in regional markets and reflects all the characteristic features of an oligopoly. The essence of this model- each competitor determines the optimal volume of supply for itself given the volume of supply of the other, and the combination of these volumes determines the market price. Thus, this model describes the pricing process in an oligopoly. Cournot's basic premise was an assumption regarding the reaction of each firm to the behavior of competitors. It's obvious that duopoly equilibrium is that each duopolist sets the output that maximizes its profit given the output of its competitor, and therefore neither has an incentive to change that output. At prices above the intersection point of the reaction lines, each firm has an incentive to reduce the price set by its competitor; at prices below the intersection point, the opposite is true. Thus, under this assumption, there is only one price that the market can set. It can also be shown that the equilibrium price moves gradually from the monopoly price to the price equal to marginal cost. Hence, Cournot equilibrium in an industry where there is only one firm, achieved at a monopoly price; in an industry with a significant number of firms - at a competitive price; and in an oligopoly it fluctuates within these limits. The development of this model is leader pricing model, in which the leader sets not the volume of his production, but the price of his products. In an oligopoly market, a monopoly price can be set without an explicit agreement between competitors. But the more competitors there are, the more likely it is that one of them will reduce the price of their products for temporary gain. For example, the struggle of two oligopolists for a buyer by establishing more and more low prices will eventually be reduced to an equilibrium between them in the form (i.e., the price will decrease to the level under perfect competition). P = MS = AC This case, the so-called price wars, described Bertrand model, according to which firms consistently reduce prices to the level of average costs, trying to push competitors out of the market. Typically, oligopolistic firms set prices and divide markets in such a way as to avoid the prospect of price wars and their adverse effects on profits. Therefore in modern conditions their price competition most often leads to agreements. The easiest way to implement a constant price ratio strategy is pricing based on the cost-plus principle. It is used because of the inherent uncertainty in the market about the demand for a product and the difficulty of determining marginal costs. The “cost plus” principle is a pragmatic way to solve the problem of real assessment of marginal revenue and marginal costs, in which certain standard costs are taken to determine the price, to which economic profit is added in the form of a premium. This method does not require an in-depth study of demand curves, marginal income and costs, which vary by product type. For a consistent pricing policy, it is enough for firms to agree on the amount of this premium. Pricing using this cost markup ensures that the firm has enough revenue to cover its variable costs. fixed costs and the opportunity cost of using factors of production. In addition to all of the above, oligopolistic pricing analysis is increasingly using game theory. It is often noted that oligopoly is a game of characters in which each player must predict the actions of his opponent. After weighing the possible consequences of various decisions, each firm will understand that the most rational thing to do is to assume the worst.
Conclusion
Concept and types of market structures
Table of main types of market structuresPerfect (pure, free) competition
Monopolistic competition
Oligopoly
Pure (absolute) monopoly
Properties of Oligopoly
Universal Interdependence
Price policy
Cooperation with other companies
Game theory
Theories of oligopolistic pricing
Organizational and economic forms of concentration
see also
Notes
Links
Literature
See what "Oligopoly" is in other dictionaries:
Types of oligopolies
Example - cars, cigarettes, soft drinks, steel (approximately 140 brands).Characteristic features of the functioning of oligopolies