Evaluation and Opinion on Oligopoly - Assignment Example

The new oligopoly is made up of multinational corporations that have chosen specific products or service categories to dominate. In each category, over time, only two to four major players prosper. Starting a new company in that market segments difficult, and the few that do succeed are often gobbled up or run out of business by the oligopolies. (Oligopoly, 2006a) Strategic Interaction: when only a few firms operate in a market, they will soon recognize their interdependence. Strategic Interaction, which is genuinely a new feature of oligopoly, occurs when each firm's business plans depend upon the behavior of its rivals.

Analyzation reveals that economists are particularly concerned about industries characterized by imperfect competition. One reason is that such industries behave in certain ways that are unfavorable to the public interest. For example, imperfect competition generally leads to prices that are above marginal costs; this results in an inefficient allocation of resources. The result of such high prices leads oligopolistic industries towards supernormal profits. However in-depth studies show concentrated industries having only slightly higher rates of profit than unconcentrated ones.

(Nordhaus, 1998, p. 171) The distinguishing characteristic of oligopoly is the interdependence among firms in the industry. Since an oligopolist knows that its own actions will have a significant impact on the other oligopolists in the industry, each oligopolist must consider the possible reaction of competitors in deciding its pricing policies, the degree of product differentiation to introduce, the level of advertising to undertake, the amount of service to provide, etc. Since competitors can react in many ways, therefore we possess several oligopoly models based on the particular behavioral response of competitors to the actions of the first.

Because of this interdependence, managerial decision-making is much more complex under oligopoly than under other forms of market structure. (Salvatore, 2001, p. 427) The following are the sources of oligopoly, which represent the barriers to other firms entering the market in the long run: Economies of scale may operate over a sufficiently large range of outputs as to leave only a few firms supplying the entire market.Huge capital investments and supplying inputs are usually required to enter an oligopolistic industry and this acts as an important natural barrier to entry.

A few firms may own a patent for the exclusive right to produce a commodity or to use a particular production process.Established firms may have a loyal following of customers based on product quality and service that new firms would find very difficult to match.A few firms may own or control the entire supply of a raw material required in the production of a product.