Is an oligopolistic market structure an example of market failure?

Is an oligopolistic food grocery place construction an type of market failure?IntroductionOne constructive approach of categorizing a market is by dividing it in terms of the number of unanimouss on the return array of the market and the buyers concentration on the hold side. Oligopoly represents one of the market social anatomical anatomical structure where in that respect argon a very few unattackables on the supply side and a huge concentration of buyers on the demand side. As the buyers fucknot affect the market contains, they atomic number 18 going to adopt it as such(prenominal) and the supplier will be busy in anticipating the rival behavior.Oligopoly looms broad in industries of steel, petroleum, automobiles etc. Many industries can operate geographically as oligopolies. For illustration banking in a small tget operate as oligopoly since there will be one or deuce banks in the ara and the residents will be forced to dupe his business to the local anesthet ic banks.( Friedman, 1983)Oligopoly a complex market structureOligopoly is virtually a grand business. Under this market structure, the rivalry takes on its worst form. Product innovations, hard-hitting advertizing and innovative marketing tactics be frequently utilize to outweigh each other. Oligopolistic market structures are the most difficult to try as they are noblely interdependent and interwoven, where moves and countermoves are taken rapidly. For poser a simple action by Ford may expire to a reaction by General Motors, which in turn go a readjustment in Fords plan, thereby modifying GMs response and so on. So anything can move on anytime in oligopoly.There are few models that high spot oligopolistic behavior. They areCartelsA fictional character come ons in monopoly when all the star signs attempt to advance interdependence and they all mutually agree to set monetary value and output. The firms finished their mutual coordination try to create a giant monopol y. OPEC (Organization of Petroleum export Countries), is an example of a cartel platform.Price leadership and Tacit collusionIt is an disposition in which one or dickens firms make an arrangement for the set for the entire firm. Other firms are forced to follow the comparable expenditure pattern although no such agreement exists in the industry.For example In the infant formula industry, Abbot laboratories, Bristol Myers Squibb and American Home Products purposely set their hurts closer to each other to dominate the industry.The Kinked Demand sprainThis model elaborates the stickiness in pricing in an oligopolistic structure. It has been hypothesized in this model that if for example, a firm X pass ups its bell in an oligopolistic market, the rival will be forced to lower its price to in order to avoid the mischief of its market base. The demand curve dd is thus the relevant curve in case of a price reduction.dHowever, if the firm X goes for a price increase, then the ca se wont be the same. The rivals will not obey this time, and would continue to enjoy the customer support as they would flee the firm X products. In this case the demand curve would be DD. The firm then tries to remain in a segment of the elastic demand curve between dd and DD. The true demand curve is represented by DAd, known as the kinked demand curve which silently points out the event heads you lose, tails you lose (Baumol and Blinder, 2009)DAPrice8(Competitors prices are fixed)7Dd(Competitors respond to price changes)0 bar per year1,4001,1001,000Game theory and the OligopolyGame theory has been formulated to render the behavior of the firms in an oligopolistic market structure that do not effect on a collaborated output and pricing. The underlying assumption is that the large bossy firms are want players in a granulose of poker. They make the moves of grievous or increasing the price, to advertise or not to advertise, to discount and so on, based on their rivals move. Understanding the payoffs can put a firm in a better position to grapple with its rival and be in a realise maximizing and rational position.For example the bet between two coffee shops is illustrated as belowCDocuments and SettingsAnumDesktop4th assignmentUnderstanding Oligopoly demeanour a Game Theory over horizon Economics in Plain English_filesgame-theory-1.jpeg rise Welker, J. (2009).Understanding oligopoly behavior-A game theory overview. Available from http//welkerswikinomics.com/blog/2009/12/15/understanding-oligopoly-behavior-a-game-theory-overview// jibe to the above figure, both San Francisco coffee and Starbucks is following a dominant strategy. They are working up to maximize their outcome through advertising, ignoring what their competitor does. If S.F advertises, Starbucks earns attain ($12 vs. $10) through advertising. This means the pay offs are the same. Since both firms are enjoying take in through advertising they will do so, though the pure(a)going prof its are less in case when both are advertising, as compared to when they are not advertising. But such a condition would be a condition of inst index, as to advertise is likely to be beneficial for both. So we say that advertise/advertise is Nash equilibrium, as at this stage none of the firm is going to change its strategy since it is delivery incentive to both (Jason Welker, 2009).Market failure due to OligopolyKeeping in view the above theories that tries to explain oligopolistic behavior, the market failure due to oligopoly can be attributed to a various causes. Inefficiency, instability and indeterminacy brought about by oligopoly may result in a market crash. The firms supremacy is realised as the capacity is established more and more, but little is produced in order to create artificial barrier to entry. The competitors compete on the foundation garment of non pricing factors such as heavy advertising, which gives more hold up to the artificial barrier to entry. Prices are well above cost and price discrimination prevails. Some of the firms also engage in self-regulation to preserve their own profits and market share that further detoriate the situation (Grewal and Kumnick, 2006). Oligopolistic firms output and prices intimately differ from what is socially accepted from them. It is also believed that the misleading advertisement by the large firms also misleads the consumers and compels them to buy products that they do not want. They impose governmental and economic power and hover over the mind of the consumers working like an invisible hand.Market FormNumber of firms in the market absolute frequency in RealityEntry BarriersPublic Interest ResultsLong speed ProfitEquilibrium ConditionsOligopolyFewProduces Large share of GDPVariesVariesVariesVaries artificial lake Economics Principles and Policy By William J. Baumol, Alan S. BlinderMC=MR applies for a profit maximizing firm, under equilibrium. However, in oligopoly, MC is usually unequal than M R generally because in oligopoly the firms are seeking to adopt strategies in accordance with the game theory, or they look for techniques such as increasing sales for profit maximisation as their ultimate goal.ConclusionIn a perfectively agonistic market place the behavior of the firms automatically lead to a maximization of consumer benefits through an expeditious allocation of re stemmas. In oligopoly however, resource allocation is usually is not well set, more focused is paid on limit output in an attempt to maneuver prices and profits. In an oligopoly everything is possible, can happen anytime anywhere, so the economists are still unable to clearly predict its behavior. Besides, its ability to lead the market down, some economists are of the belief that oligopoly has made a significant contribution towards the economic growth in the noncurrent two decades resulting in an increase in the average income of the rich countries.(Baumol and Blinder, 2009).Question twoWhat are t he implications for management of businesses in such structures?IntroductionOligopoly is a market characterized by few firms. Managers of a firm in such a structure know that their firm enjoys a market power. But the other players also have their share of power too. If the buss take the right line of action, properly assessing the behavior of their rivals in the industry, they are likely to make a profit.Strategic behaviorStrategic behavior refers to the firms ability of proper stipulation of their market power and awareness of their rivals move. Strategic behavior occurs in oligopolistic structures where there is less product differentiation and a hawkish industry exists (Taylor and Weerapana, 2009) implication for the managersThe most important implication for the managers regarding oligopoly is the pricing practice on the bottom of mutual interdependence. In case of monopoly, the absence of competition enables the managers to follow the MR=MC role to maximize its profit. Sim ply following the MR=MC isnt just enough. warningConsider, for example the case of proctor and gamble, where the manager hires a consultant for the thorough analysis of the cost, structure and demand. After a detailed analysis of the structure of the body soap products, the manager follows the MC=MR rule and set the retail price at $1.99.In a sudden move, the competitors Colgate-Palmolive , Lever brothers etc set the price of the comparable product 10 to 15 below to that of proctor and gamble. What the manager is likely to do? Either he can go for advertising and heavy promotion to compete against the lower prices of the competitors or can lower its prices down. Or he can simple do nothing if he is confident enough of the real loyalty that his brand enjoys among consumers. The point is that, that pricing in oligopolistic structure cannot be done without taking into account your competitor. This is the gist of mutual interdependence (Young and McAuley,1994)The second implication fo r the managers is to understand that it can be extremely difficult to make money in a competitive market. Firms are required to be as much cost efficient as possible because they cannot control the prices.The managers are supposed to be hawk-eyed enough to be able to spot opportunities and enter the market in the first place the others could enter. They should be able to make their place before the demand gets high enough to support an above normal price.A situation could arise in oligopoly, where the managers in a firm become so happy in beating up the competition that the firm turns into a monopoly, or the one that can exercise monopolistic power. Such a case happened with IBM when In 1969, the firm dominated the computer market so much so, that the department of Justice had to issue an antitrust suit against it (Keat, Young and Benerjee, 2009) worldwide implication for managersThe managers should keep in mind that the process of benchmarking in an oligopolistic structure stra tegy formulation should be done keeping in view both domestic as well as the global competitors.For example AT T communications not only took into account Yankee telecom but also Siemens, Ericsson and NEC and Fujitsu.Many of the firms that refuse to take challenge from the foreign firms are likely to nerve consequences. Like umpteen American firms got a serious blow from their Japanese competitors in the past 20 years. Companies like IBM and Caterpillar enjoys success because they established a strong hold in the Japanese market well before time.The oligopolistic structure also highlighted the importance of alliance for the managers. Alliances enable the firm to acquire technology from the rival firm. Whilst the acquisition of the technology can be a source of benefit for the firm, the firm giving up the technology can face causalities ( Yoffie,1993)ConclusionThe managers of an oligopolistic market structure have to take into account several(prenominal) aspects in their decisio n making. The managers are plunged into complex pricing decision. They take into devotion the three Cs of Cost, customers and competition in their decision making. Price wars were habitual in an oligopolistic market, but they are becoming less frequent with the transition of time, mainly due to the realization of the managers. Managers have understood, through their bitter experiences, that the price wars are costly and do not bring any benefits. They chose to compete on the advertising and on product variations. So they have elect not to compete on prices and have found for themselves a pathway of mutual advantage.