Oligopolies

Purpose:

To show that many markets are dominated by a small number of firms, and how these try to avoid price competition.

Objectives:

Most markets in the U.S. fall somewhere in between perfect competition and monopolies. Either there are only a few large firms in an industry (oligopoly), or there are many firms which sell differentiated products (monopolistic competition). Producers in these industries realize that price competition will only reduce profits for every firm in the industry so they often try to gain market power through nonprice competition (e.g., product differentiation, advertising, and aggressive marketing).

When there are few firms in an industry, they may attempt to fix prices. This results in higher prices and less production of the good than would occur under perfect competition, and it adversely affects economic efficiency. Unregulated price fixing is illegal.

Large firms may be very helpful for stimulating long-term growth through R&D, by capturing economies of scale, by superior management, and through their efforts to grow larger.

In some industries (airlines, railroads, trucking) the government has regulated prices either to help the industry grow or to control the pricing behavior of the industry. Generally, the affected industries favor regulation because it saves them from having to compete on the basis of price, but they often become very inefficient and have unnecessarily high costs. Also, regulated companies can often capture and co-opt regulators.