Oligopoly

Learning outcomes:

At the end of the lesson, the students must be able to:

Oligopoly refers to a market structure in which a few large firms dominate the industry. These firms
have the power to influence market prices and often engage in strategic behavior to gain an
advantage over their rivals. In an oligopoly, the market is characterized by a high degree of
concentration, which makes it difficult for new firms to enter the industry.
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Introduction
Characteristics of Oligopoly
The main characteristics of oligopoly include:

1. Small number of large firms: In an oligopoly, a small number of large firms dominate the market.

2. Interdependence: The actions of one firm affect the performance of the other firms in the
industry. Firms must take into account the reactions of their rivals when making business
decisions.

3. Strategic behavior: Firms in an oligopoly engage in strategic behavior to gain an advantage over
their rivals. This can include price setting, product differentiation, and advertising.

4. Entry barriers: Due to the high degree of concentration, it is difficult for new firms to enter the
industry.
Introduction
Importance of Oligopoly in the Economy

Oligopoly is an important market structure in the economy because it affects the way firms compete
and interact with each other. Oligopolies can have a significant impact on the economy, as they
often control a large share of the market and influence prices. In addition, oligopolies can drive
innovation and investment in new technologies, as firms compete to gain a competitive advantage.
However, oligopolies can also lead to higher prices and reduced consumer choice, which can be
harmful to consumers. As a result, governments often regulate oligopolies to prevent
anticompetitive behavior and protect consumers.
Types of Oligopolies

1. Pure Oligopoly

2. Differentiated Oligopoly

3. Collusive Oligopoly

4. Non-Collusive Oligopoly
Types of Oligopolies

Pure Oligopoly

A pure oligopoly is a market structure in which all firms in the industry sell identical products. In a
pure oligopoly, firms compete on price, and there are no differences in the products they sell. The
key characteristic of a pure oligopoly is that the firms in the industry are highly interdependent, and
each firm must take into account the reactions of its rivals when making business decisions.
Types of Oligopolies

Differentiated Oligopoly

A differentiated oligopoly is a market structure in which firms sell products that are differentiated
from each other. In a differentiated oligopoly, firms compete on the basis of product quality, design,
and features, rather than just price. The key characteristic of a differentiated oligopoly is that firms
have some market power due to the differentiation of their products, but they are still highly
interdependent and must take into account the reactions of their rivals when making business
decisions.
Types of Oligopolies

Collusive Oligopoly

A collusive oligopoly is a market structure in which firms in the industry cooperate to reduce
competition and increase profits. In a collusive oligopoly, firms may engage in price fixing, market
sharing, or other forms of collusion to reduce competition and increase their market power. The key
characteristic of a collusive oligopoly is that firms work together to reduce competition, rather than
competing against each other.
Types of Oligopolies
Non-Collusive Oligopoly

A non-collusive oligopoly is a market structure in which firms in the industry do not cooperate with
each other, but still engage in strategic behavior to gain an advantage over their rivals. In a non-
collusive oligopoly, firms may engage in aggressive advertising, pricing strategies, or product
innovation to gain a competitive advantage. The key characteristic of a non-collusive oligopoly is
that firms do not work together to reduce competition, but still face high levels of interdependence
and must take into account the reactions of their rivals when making business decisions.
Collusion in Oligopoly

Definition of Collusion

Collusion refers to a situation where firms in an oligopoly work together to reduce or eliminate
competition in the market. This can take many forms, such as price-fixing, market sharing, and
output restrictions. Collusion is generally illegal and can result in significant fines and penalties for
the firms involved.

There are two main types of collusion.

Explicit Collusion: Explicit collusion occurs when firms openly communicate with each
other and reach an agreement to restrict competition in the market. This can take the form
of price-fixing, where firms agree to set prices at a certain level, or output restrictions,
where firms agree to limit the amount of output they produce. Explicit collusion is illegal in
most countries and can result in significant fines and penalties for the firms involved.

Example: OPEC is a group of countries that produce and export oil, and they formed a cartel in the
1970s to control the supply and price of oil in the global market. The member countries of OPEC
agreed to limit their oil production and to set prices at a certain level, effectively restricting
competition in the market. This is an example of explicit collusion because the member countries
openly communicated and reached an agreement to restrict competition.
Types of Collusion

Tacit Collusion: Tacit collusion occurs when firms restrict competition in the market without openly
communicating with each other. This can take the form of price leadership, where one firm sets the price
for the market, and other firms follow suit, or mutual interdependence, where firms respond to each
other's actions in a way that restricts competition. Tacit collusion is difficult to prove and is often not
considered illegal unless there is evidence of explicit communication or coordination between firms.

Example: An example of tacit collusion is the airline industry. In this industry, airlines often follow a
similar pricing strategy where they adjust their prices in response to changes in demand, fuel costs, and
other factors. This can result in similar prices for flights and reduced competition in the market, even
though the airlines are not openly communicating or coordinating with each other. This is an example of
tacit collusion because the airlines are restricting competition without explicitly communicating or
reaching an agreement.
Collusion in Oligopoly

Cartels

Cartels are a type of explicit collusion where firms in an oligopoly form a formal agreement to
restrict competition in the market. Cartels typically involve price-fixing, output restrictions, or
market sharing, and can be difficult to detect and prosecute. Cartels are illegal in most countries
and can result in significant fines and penalties for the firms involved.
Collusion in Oligopoly

Cartels

The Philippines has seen a few examples of cartels in various industries over the years. Here are
some examples:

1. Rice cartel: In 2014, the Philippine Competition Commission (PCC) launched an investigation into
a possible rice cartel in the country. The investigation found that some rice traders had engaged in
price-fixing, bid-rigging, and other anticompetitive practices, leading to higher rice prices for
consumers.
Collusion in Oligopoly

Cartels

The Philippines has seen a few examples of cartels in various industries over the years. Here are
some examples:

2. Cement cartel: In 2019, the PCC fined four cement companies a total of P1.02 billion for forming
a cartel that raised prices and limited the entry of new competitors into the market. The companies
were found to have engaged in price-fixing and market allocation, among other anticompetitive
practices.
Collusion in Oligopoly

Cartels

The Philippines has seen a few examples of cartels in various industries over the years. Here are
some examples:

3. LPG cartel: In 2017, the Department of Energy (DOE) conducted an investigation into an alleged
cartel in the liquefied petroleum gas (LPG) industry. The investigation found that some LPG suppliers
had engaged in price-fixing and other anticompetitive practices, leading to higher prices for
consumers.
Collusion in Oligopoly

Price Leadership

Price leadership is a type of tacit collusion where one firm in an oligopoly sets the price for the
market, and other firms follow suit. This can occur when one firm has a dominant market position
or is perceived to be a leader in the industry. Price leadership can be effective in reducing
competition in the market but can also lead to inefficiencies and higher prices for consumers. Price
leadership is generally not illegal unless there is evidence of explicit coordination or communication
between firms.
Oligopoly and Market Outcomes

1. Price competition and collusion

2. Price and output determination

3. Economic efficiency in oligopoly

4. Market power and consumer surplus

Price competition and collusion

In an oligopoly, firms may engage in price competition or collusion. If firms compete on price, they
may engage in price wars that can lead to lower prices and reduced profits. Alternatively, firms may
collude to fix prices and reduce competition. Collusion can lead to higher prices and increased
profits for firms but it can also harm consumers.
Oligopoly and Market Outcomes

Price and Output Determination

Oligopolistic firms have interdependence when it comes to pricing and output decisions. Firms must
consider the actions of their rivals when making these decisions. In an oligopoly market, a small
change in the output or price of one firm can have a significant effect on the market outcomes. The
pricing strategies of firms in oligopoly markets can lead to price stability or price fluctuations.
Oligopoly and Market Outcomes

Economic Efficiency in Oligopoly

In an oligopoly market, firms may not always produce the optimal level of output from the
perspective of social welfare. Firms may produce less output than what would be socially optimal,
leading to deadweight loss. However, oligopoly firms may also invest in research and development,
which can lead to innovation and economic growth.
Oligopoly and Market Outcomes

Market Power and Consumer Surplus

In an oligopoly market, firms have market power, which is the ability to influence the market
outcomes. When firms have market power, they can charge higher prices, which can lead to
reduced consumer surplus. However, firms may also engage in non-price competition, such as
product differentiation, to increase consumer surplus. Oligopoly firms may also benefit from
economies of scale, which can lead to lower costs and lower prices for consumers.