The Recording Firms in the Oligopoly Consolidate Power - Assignment Example

The paper “The Recording Firms in the Oligopoly Consolidate Power " is a telling example of an assignment on macro and microeconomics. An oligopoly refers to a market structure in which a few big firms control most parts of the market, whereby they will dominate the market for the similar products they deal with. The leading firms in the oligopoly will take up a large market percentage and this results in a concentration of the market. There exist barriers to entry in the oligopoly as the leading firms will use various strategies to see that the less powerful firms do not become successful in the market. as a result, competition is eliminated although the big firms will advertise heavily so as to continue controlling the market. Each of the firms in the oligopoly is aware of the other firm's actions for example pricing strategies and at times the firms form collisions so as to avoid price wars, which may lead to unfair competition. However, although the leading firms dominate the market, other smaller firms are also in the market but they will have problems venturing deep into the market because of the high level of completion and barriers to entry(McEachern 226). Oligopolies are identified with concentration ratios, which will determine the portion of the market that is controlled by the firms in the oligopoly. an example of an oligopoly is the recording companies, which are made up of four leading companies, namely, Universal, Sony BMG, EMI, and Warner.

2. Universal has a market share of 25.5%, followed by Sony with 21.5%, then EMI with 13.4%, and lastly warner with 11.3%. The rest of the share, which is 28.4% is owned by another firm, which shares this percentage (IFPI, 2005). This shows that the four firms control the market and they will dictate the terms in the market.

3. The small producers trying to enter the market will face barriers imposed by the larger firms. The large firms will impose various barriers, which will deter smaller firms from succeeding in the market. Economies of scale will mean that the large firms will have resources and will have quality production hence deterring small firms from taking up much of the market share. The large firms will also own much of the resources required for production and this gives them an advantage over the small firms. Small firms trying to get into the market will require high set up costs because the large firms have already set high standards and this means that if they do not have enough capital, the small firms will not be able to establish themselves.

Consumers will be affected by oligopolies in a number of ways. The high concentration of the market has the effect of reducing consumer choice as they will have to take or leave the products produced by the leading firms. Forming of cartels by the leading firms will have the effect of reducing competition and this has the overall effect of increasing prices and possibly reducing quality.

4. The recording firms in the oligopoly consolidate power by exercising predatory pricing, which will push smaller firms out of business. Predatory pricing occurs when the large firms agree to set very low prices, and this will force the small rival firms out of business. The predatory acquisition also affects the small firms as the large firms will purchase the majority shares in the effort of trying to acquire a controlling interest (McEachern 225).