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Managerial Economics - Essay Example

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Managerial Economics The term oligopoly has its origin from the combination of two Greek words. They are ‘Oleg’s’ and ‘Pollen’. The former means ‘a few’ and the latter means ‘to sell’. Thus, the term ‘oligopoly’ in business means a situation when the number of companies selling a particular product or service in the market is very few…
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Managerial Economics
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Download file to see previous pages It happens because when the number of firms is few, any change in the price or quality of the products by one company will have an immediate and direct impact on the other companies. When this happens, it is highly likely that the rivals will immediately respond with similar or more aggressive changes. Thus, in oligopoly, companies remain in constant vigil about the actions and reactions of their opponents (Bolotova et al 2005). Also, companies will hesitate to adopt any such tactics to gain market share because the rivals will immediately respond with similar strategies (ibid). When this happens, it seems that most of the companies start giving more attention to advertising and selling costs. As other strategies will not work, companies try to increase their advertisement in order to achieve maximum sale. Similarly, companies will start reducing selling costs so that profits can be maximised. Yet another important feature is price rigidity. In an oligopoly system, prices often remain rigid because firms are afraid of making changes because of the price-war (Liu & Serfes 2006) Another important point to be mentioned here is the importance of strategy. To illustrate, in oligopoly, it is highly necessary for firms to be careful about their own strategies because they cannot act independently. It is highly necessary for them to decide when to collude with their rivals and when to compete with them. Also, it is highly necessary to be careful while raising or lowering the prices. Admittedly, these features lure the companies to collude in order to reduce uncertainty and also to enjoy monopoly and higher profits. These firms often engage in various forms of collusion, ranging from overt collusion, covert collusion, and tacit collusion. Overt collusion occurs when firms openly engage in agreements like trade associations. Covert collusion is kept hidden in order to hide the results of the collusion. Thirdly, tacit collusion is the result when all firms in an oligopoly act in concert even without the existence of an agreement. One of the most notorious cases of collusion is the lysine price-fixing conspiracy. It took place in the mid 1990s, and various companies from various countries were involved. They were Archer Daniels Midland from the US, Japan companies named Ajinomoto and Kyowa Hakko Kogyo, Korean companies named Sewon America Inc. and Cheil Jedang Ltd. These companies colluded to raise the price of an important animal feed additive called lysine. It is seen that these companies, through the price-fixing, managed to raise the price of the product by 70% (Liski & Montero 2006). Thus, it becomes evident that the cartel helped the companies to raise their profit through gaining monopoly (ibid). It is found that in a perfect market, it is not possible for companies to collude easily because the decisions of a few companies will not impact the market as a whole. However, in an oligopoly market, the collective decision taken by a few companies will have significant impact on the whole market. This will give the companies monopoly and increased profits. Very similar is the case of the beer companies Heineken, Grolsch, and Bavaria, which made a price-fixing deal in Holland, monopolising beer distribution. In fact, these companies collectively controlled 95% of the Holland beer market (Brue & Mcconnell 2006, p. 210). Through collusion, they increased the beer price ...Download file to see next pagesRead More
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