Modelling in an Oligopolistic Market Structure

According to Tucker (2009), oligopoly is a market structure which is characterized by difficult market entry, differentiated or homogeneous product, and few sellers. Some industries which can be best described as oligopolistic include steel, drugs, aluminum, tobacco, aircraft, and automobile. Mankiw (2008) pointed out that oligopoly lies between the two extreme cases of monopoly and competition. However, unlike perfect competition, oligopoly is characterized by an imperfect completion due a few number of sellers which subdue rigorous competition.

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In a monopolistic structure, each firm in the competition enjoys a certain level of independence and a firm can make decisions without caring how other firms will react (Hall & Liebermann, 2013). Oligopoly is characterized by few sellers. The few sellers, usually powerful firms, makes it easier for the firms to collude due to mutual interdependence among the firms. The homogenous or differentiated product is characterized of oligopoly. The product homogeneity or differentiation imply that buyers are unconcerned as to which firms product to buy. The existence of formidable barriers prevents new entrants from entering into an oligopoly. This keeps only work to protect a few sellers (Tucker, 2009). All these characteristics of an oligopoly make them very difficult to model

The difficulty of modelling an oligopolistic market structure can also be understood by studying oligopolistic demand curve. The demand curve is indeterminate for a number of reasons. The interdependence nature of firms in an oligopolistic market makes it impossible for such firms to come up with a definite and sure demand curve. This is due to the fact that firms in the market may in many different ways following a reaction by one firm. When a firm chooses to react in a certain way, it impacts the other firms which are forced to identify ways to which they can react to the move made by the first firm. Different policies adopted by an oligopolistic firm have an impact on other oligopolistic firms in the market. For example, when a firm choose to lower prices of its product, other oligopolistic firms may react in different ways. The other firms in the market might react by lowering their prices by the same amount, leaving the prices as they were, or even lowering the prices larger than the amount the first firm reduces. It is, therefore, impossible for an oligopolistic firm to predict the behaviors of other firms in advance due to a variety of reactions they can take. Furthermore, rival firms might opt to fight each other fiercely or cooperate together within the law in pursuit of their interests. This is a major reason why it is impossible to model the structure of an oligopolistic market structure. The demand curve remains indeterminate, and that explains why it is difficult to come up with a general theory of oligopoly (Ghai & Gupta, 2002).

References

Ghai, P. & Gupta, N. (2002). Microeconomics Theory and Applications. New Delhi: Serup & Sons.

Hall, R. & Liebermann, M. (2013). Economics: Principles and Applications. Mason. OH: South-Western Cengage Learning.

Mankiw, G.N. (2008). Principles of Economics. Mason, OH: South-Western Cengage Learning.

Tucker, I. (2009). Survey of Economics. Mason. OH: South-Western Cengage learning.