Oligopoly Theory Study Materials

Courses : Intermediate Microeconomics Lecturer : Frischa Adellia Semester : 4th Semester, 2022/2023 Sesion Oligopoly Theory Oligopoly theory is a market theory in which there are several large companies that control the market. The hallmark of an oligopoly market is that there are a few producers, but a large number of buyers. The firms involved in the oligopoly can mutually influence prices and production, and earn large profits. In general, there are two types of oligopoly: perfect oligopoly and imperfect oligopoly. A perfect oligopoly occurs when the products produced by oligopolists are perceived by consumers as identical. Meanwhile, imperfect oligopoly occurs when the products produced by oligopoly firms are perceived differently by consumers. Oligopoly is also divided into two types based on company behavior, namely collusive oligopoly and non-collusive oligopoly. A collusive oligopoly occurs when oligopoly firms cooperate to determine prices or production, whereas a non-collusive oligopoly occurs when oligopoly firms compete for market share. In oligopoly theory, there is the concept of interdependence between oligopoly firms. This interdependence makes every company have to take into account the reactions that might be made by other companies to the decisions taken. Therefore, the decisions taken by one company will affect the decisions taken by other companies. The oligopoly theory explains that a market is dominated by several large companies which affect the price and quantity of production. Some of the characteristics of an oligopoly market include: 1. There are several large companies that dominate the market, so these companies affect the price and quantity of production. 2. There is a difficult level of entry for new companies into the market due to high barriers to entry. 3. Companies in an oligopoly market have a tendency to observe each other and imitate the actions of their competitors, so that complex interactions can occur between them. 4. Firms in an oligopoly market can form consortia or cartels to control the market. Oligopoly theory can help understand how large firms interact in the market and how they affect prices and production quantities. This theory can also help design appropriate policies to regulate oligopoly markets and prevent oligopolies that harm consumers. The oligopoly theory describes a market in which there are a few sellers who control the majority of the market share. In an oligopoly market, each seller has great power to influence market prices, but the influence is not as great as in a monopoly market. The characteristics of an oligopoly market include: 1. Few sellers: An oligopoly market is generally filled with a small number of firms competing with each other. The number of these companies may vary depending on the particular industrial sector and geographical area. 2. Product differentiation: The products offered by firms operating in oligopoly markets tend to have significant differences in terms of features, quality or brand. This product differentiation allows companies to set different prices for similar products. 3. Interdependence: Each firm in an oligopoly market is highly dependent on the actions of its competitors. This is because the company will consider the reaction of competitors when setting prices or releasing new products to the market. 4. Large influence on prices: Although not as great as in a monopoly market, each firm in an oligopoly market has considerable power to influence market prices. Companies can use different pricing strategies to compete with their competitors, such as lowering prices to increase market share or increasing prices to increase profits. 5. Barriers to entry: Oligopolies tend to have high barriers to entry, such as large capital costs or strict government regulation. This makes it difficult for new companies to enter the market and compete with established companies. The oligopoly theory is a theory that explains how interactions between several high-powered firms (oligopolists) affect the market. There are several theories related to oligopoly, including: 1. Asymmetric Ownership Theory: This theory explains how different companies have different power in the market. Stronger companies will tend to dominate the market and force weaker companies out of the market. 2. Tendency to Collusion Theory: This theory explains how oligopolists tend to collude and reduce their competition. This collusion can be in the form of market division, price fixing, or other policies that are detrimental to consumers. 3. Game Theory: This theory explains how oligopoly firms influence each other in making decisions. The Company will pay attention to each other and consider the actions of opponents in making decisions. This theory can also help in predicting how the company will act in various scenarios. 4. New Theory of Oligopoly: This theory emphasizes the importance of innovation and differentiation in oligopoly. Companies that are more innovative and have more differentiated products will be better able to survive in the market and gain greater profits. In practice, oligopolies are often regulated by the government through anti-monopoly policies to prevent these companies from taking actions that are detrimental to consumers and undermine competition in the market.