Oligopoly+-&nbsp;Be+able+to+apply+the+model.+Game+theory

=Oligopoly=

By definition an [|oligopoly] is a market dominated by a few large suppliers. Oligopolies are further characterized by having large market shares for each individual firm, products differentiated by branding, and substantial barriers to entry. An oligopolistic market structure is similar to a monopoly;however, there needs to be at least two firms controlling the market in order to constitute an oligopoly. Firms within an oligopoly produce similar versions of the same product which have been branded individually by each company. [|Product branding], the differential marketing and advertising of company's products, is the driving force behind competition in an oligopoly. Since the product offered by competing firms is practically the same or serves the same purpose, each firm spends a great deal of time and resources on making their brand the most recognizable and sought after. Oligopolistic firms greatly affect the price of the product or service they are offering. The power of each individual firm to change product prices is kept in check by the need to anticipate the likely reactions of competing firms to such a price change. This interdependence of the firms regarding pricing and investment decisions leads to a game like situation of guessing how the opposition will respond. This game-like approach to dealing with the uncertainity of the oligopolistic market is referred to by economists as 'game theory' which will be further discussed below.

Characteristics of an Oligopoly Compared to Other Common Market Structures
by definition** ||
 * **Characteristics** || **Perfect Competition** || **Monopolistic Competition** || **Oligopoly** || **Pure Competition** ||
 * **Number of sellers** || **Many** || **Many** || **Few, dominant** || **One** ||
 * **Individual firm's market share** || **Tiny** || **Small** || **Large** || **100%** ||
 * **Type of product** || **Homogeneous** || **Differentiated** || **Homogeneous or differentiated** || **Homogeneous
 * **Barriers to entry** || **None** || **None** || **Substantial** || **Complete** ||
 * **Consumer information** || **Perfect** || **Slightly Imperfect** || **Perfect or Imperfect** || **Perfect of Imperfect** ||

Graphical representation of an oligopolistic industry reflects the imperfect nature of competition that results from the interdependence of firms. The demand curve in an oligopoly shows both the elasticity and inelasticity of demand. Above the equilibrium point, demand is fairly elastic due the to availabilitly of other firms' products as substitutes if one firm decides to raise prices. This is shown in the graph to the left in the part of the demand curve between point E and the y axis. Notice the demand curve is flatter in this are. Once the demand curve hits the equilibrium point it becomes more inelastic. This is shown between point E and the x axis in the graph below. Notice this part of the demand curve becomes more up and down. This means that a change in the price of one product in this region of the demand does little to affect the quantity demanded because all other firms will likely introduce the same price change. Put more simply, competing firms will match price falls but not price increases. Overall the best place for a firm to be is at the equilibrium point.

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Collusive and Competitive Oligopolies
Oligopolistic firms are able to control the market either through collusion or being competitive with one another. A [|collusive oligopoly] is generally illegal if firms meet to discuss pricing strategies and ways to collectively earn the greatest profit (overt collusion). Another type of collusion (tacit collusion) is not generally seen as being illegal due to oligopolistic companies reacting to market changes in similar ways but not meeting to discuss strategies to keep other companies out, as described above by overt collusion. The Sherman Antitrust Act regulates collusion by prohibiting overt collusion. Severe financial penalties as well as imprisonment of Chief Executive Officers are penalties imposed upon firms found quilty of overt collusion. In a competitive oligopoly situation, firms are working against each other, trying to maximize their own profits, not collusively (together). Firms competing in an oligopoly that sell homogeneous products, which can be substituted for one another, are practically forced to lower price as low as marginal cost in order to obtain at least some share of the market. Since homogeneous products are stong stubstitues, consumers will likely buy the least expensive product thus driving the continual lowering of prices. Firms in this situation must then look to improve efficiency in order to cut costs hopefully below that of competitors. This situation is a prime example of how firms within an oligopoly must pay careful attention the the pricing and investment of competitors. Failure to monitor the actions of other firms could result in a firm missing out on market share.

Pricing Theories

 * Oligopolistic firms collaborate in order to charge the monopoly price (collusion)
 * Oligopolistic firms compete with each other, producing pricing and profits like in a competitive industry
 * Price and profits in an oligopoly lie somewhere in between the extremes of monopoly and competition
 * Oligopolistic prices and profits maybe be unable to be actually determined due to the the difficulty in pinpointing the interdependent pricing decisions

Industry Examples
A common example of an oligopoly may be seen in the tobacco industry in which there are several different cigarette companies, each producing the same basic product. Other oligopolistic industries within the United States include accounting and audit services, beer, aircraft, military equipment, motor vehicles, and film and music recording industries. As discussed earlier, factors such as the number of firms and the size of each firm's market share help classify industries as being oligopolistic. Specifically, the [|four-firm concentration ratio] is a measure used to determine the market share of each of the four largest firms in the industry. Use of the four-firm concentration ratio method allows for quantitative measurement and classification of oligopolistic markets. By definition, an oligopoly is a market whose four-firm ratio is above 40%. According to published data, the U.S. tobacco industry has a [|four-firm ratio] around 80%, and the transportation equipment industry has a four-firm concentration ratio greater than 65%.

Game Theory
When looking at [|game theory in relation to an oligopoly], game theory represents the best decisions being made by each company in relation to what is going on in the market. Each firm in the oligopoly, in a sense, plays off of eachother in order to receive the greatest utility for their firm. When analyzing the market, firms develop sets of strategies called equilibria in order to respond the possible actions of competing firms. A set of strategies which is the best possible response to the strategies of others is known as the Nash equilibrium. If all firms in an oligopolistic market are following strategies that are part of a Nash equilibrium then all firms will be responding in the best way possible to the actions of all other firms. The reaction of one firm to an initial price change in turn serves as a promotor for another firm to undergo its specified reaction. The interdependence of decisions and reactions makes oligopolistic markets extremely dynamic and unpredictable. Again, the concept of game theory is that each firm makes the best decisions for themselves based on what is going on with the market and the other companies in it. This may create an oligopoly in that each firm is trying to make the best decision for themselves (competitive) or is following the trends of what the market does (tacit collusion).

Oligopolies in Healthcare
Although textbook characteristics of oligopolies have been discussed thus far, it is important to remember that not every characteristic has to be met exactly in order for real world markets to be considered oligopolistic. Two significant real world examples of healtcare oligopolies include the blood bank industry during the late twentieth century and the dominance of Johnson & Johnson, a drug and medical device supplier. The blood bank industry during the nineties was split between the American Red Cross (46% of business) and America's Blood Centers (47%.) Due the the sanctioning of local blood monopolies, each company held respective monopolies on the blood industry in certain regions of the country. A gutsy move by the American Red Cross to enter regions formerly monopolized by America's Blood Centers sparked a price competition that eventually resulted in lower blood prices than in any of the markets with a lone blood supplier. This competition between the two companies ultimately lowered prices as is predicted in the competitive oligopoly model. As an example, blood prices in Florida ( a very competitive market) were found to be $ 45 cheaper per unit than in areas such as New York which had little competition.

The Johnson and Johnson example involves the loss of nearly 90% of J&J's market share in an 18 month time span. In 1997 when J & J had patent protection of it's stent, the company controlled 95% of a $600 million market. During this time J & J strictly enforced the 'monopoly' price that resulted from them being the only provider due to the protection of their patent. Johnson and Johnson's failure to issue price breaks to hospitals and physicians angered these buyers, thus prompting them to look for other stent alternatives. The anger of hospitals and physicians over J & J's tough pricing led these groups to actively participate in helping other companies get new stents patented. Over the course of a year and a half, a new company that emerged in the stent market caused J & J to lose practically 90% of it's market share. The power of competitive oligopolies to lower prices is unweilding. This example also illustrates how although barriers to entry into the stent market were high, physicians and hospitals who were angered by J & J's monopolistic pricing behavior helped lower those entry barriers to allow competiting firms the ability to enter the market. These are two real-world historical examples of oligopolies in the healthcare industry which illustrate that not every oligopolistic situation looks exactly the same.

a. collusion b. competitive strategies c. by gaining 100% market share d. a and b e. a and c; but not b** ans: b. through collusion or competitive strategies
 * Questions:**
 * 1. What are the ways oligopolies take over in a market?

ans: at least two
 * 2. How many companies does a market need to be considered an oligopoly and not a monopoly?**

ans. False; although the barriers to entry aren't complete in an oligopoly, there are still substantial barriers to entry present
 * 3. True or False? One of the main differences between an oligopoly and a monopoly is that an oligoply does not have any barriers to entry while a monopoly has complete barriers to entry.**

a. car manufacturers b. accounting and auditing services c. military equipment e. all of the above** ans. e; all of the above
 * 4. Which of the following are examples of markets with an oligopoly in the United States?

a. 20% b. 30% c. 35% d. 40%** ans. d. 40%
 * 5. A four-firm concentration ratio of or above indicates the existence of an oligopoly within an industry.

a. Product differentiation based on advertising and marketing is important in order to fuel competition in an oligopoly due to the fact that oligopolistic firms produce very similar products b. Firms within an oligopoly should make pricing and investment decisions without regard for how the other firms in the industry might react c. Firms in an oligopoly can react in similar ways to market changes (thus having the same prices) without breaking the law as long as prices were not specifically agreed upon by the firms (collusive activity) d. Oligopolistic firms are interdependent and must consider the reactions of other firms when making pricing and investment decisions.** ans. b.
 * 6. Which of the following statements is NOT true

ans. False; the ability to make profits is based on paying careful attention to the actions of competing firms so as not to miss out on price changes that could be detrimental to a firm who fails to lower prices along with the other firms.
 * 7. True or False? Game theory refers to fact that the ability to make profits in an oligopolistic market does not rely on competition but rather is strictly a matter of chance similar to many common card or dice games.**

Yet Another Healthcare Merger. (2003). //Oligopoly Watch//. Retrieved April25, 2007. http://www.oligopolywatch.com/2003/10/29.html More Data on Concentration Ratios. Retrieved March 27, 2007. http://www.swarthmore.edu/SocSci/Economics/fpryor1/Concentration_ratios.pdf Oligopoly. (2007). tutor2u: Supporting teachers: inspiring students. Retrieved March 27, 2007. http://www.tutor2u.net/economics/content/topics/monopoly/oligopoly_notes.htm (2007). Oligopoly. Retrieved March 15, 2007, from answers.com Web site: http://www.answers.com/topic/oligopoly Santerre, R, & Neun, S (2007). //Health Economics//.Mason: Thomson Southwestern. Oligopoly. (2007). In //Wikipedia// [Web]. Wikimedia Foundations, Inc.. Retrieved 4/15/2007, from http://en.wikipedia.org/wiki/Oligopoly Game Theory. (2007). In //Wikipedia// [Web]. Wikimedia Foundation, Inc.. Retrieved 4/15/2007, from http://en.wikipedia.org/wiki/Game_theory