Competition. Modern theories of oligopoly (most important)

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Competition. Modern theories of oligopoly (most important)

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27. Modern theories of oligopoly

With such an organization of the market, a small number of relatively large enterprises selling homogeneous or slightly different products are represented on it. A few sellers in this market are opposed by a significant number of buyers.

The main features of an oligopoly market are:

1. Limited number of sellers.

2. High non-strategic barriers to market entry.

3. Substitutability of goods from different enterprises.

Features of oligopoly markets have a contradictory effect on competition between enterprises and the extent of their monopoly power, since the substitutability of goods stimulates competition, and high barriers allow you to maintain market power and monopoly profit. Monopoly power in the market of an oligopoly is limited only by the mutual policy of sellers.

Prices in the oligopoly market can be set in a fairly wide range, two extreme situations are a price war and a cartel.

price war. With the same average costs (AC) of sellers, there is only one price, when none of them has an incentive to change it - this price is equal to the average costs: Pi=Pj=AC. At this price, sellers are deprived of monopoly power, the Lerner coefficient of monopoly power (at constant returns to scale, when average costs equal marginal costs) takes on a value of zero. The equilibrium market price is equal to that which would have developed in a long-term equilibrium in a perfectly competitive market.

Bertrand's paradox: there is enough competition between two enterprises in the market to obtain an effective result for society - the lowest possible price and, accordingly, the largest possible sales volume.

Cartel. Sellers enter into a cartel agreement on a single price and sales quotas. The determination and observance of sales quotas by each seller in the market allows oligopolistic enterprises to obtain the maximum profit for a given market capacity, equal to the profit that a monopoly enterprise would receive. The Lerner monopoly power coefficient for each enterprise in an oligopolistic market is L=-1/Ed, i.e., monopoly power is limited only by market elasticity.

The equilibrium parameters of the oligopoly market can coincide with the equilibrium parameters of the perfect competition market (when interacting according to Bertrand), or with the parameters of the monopoly market (when forming a cartel). In general, the price charged by enterprises in the oligopoly market will not fall below average economic costs and will not be set above the price of the pure monopoly market.

Author: Ilyina V.N.

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