Oligopoly and Government Intervention

Oligopoly

An oligopoly is a market structure where a few large firms dominate the industry.

Products may be:

There are usually significant barriers to entry.

Collusion occurs when firms in an oligopoly cooperate to influence prices or production.

An agreement among firms to sell at the same or similar prices.

An association of producers formed to coordinate prices and production.

Oligopolies may also engage in price wars, where firms compete by reducing prices.

Market power is the ability of a firm to control prices and output.

Generally:

Markets with greater market power tend to have higher prices and lower output.

Predatory pricing occurs when a firm sets its price below cost for a short period to drive competitors out of the market.

After competitors leave, the firm may increase its price.

Governments may use competition policies to prevent firms from gaining excessive market power.

Anti-trust laws are designed to encourage competition and limit monopoly or oligopoly power.

Four forms include:

Regulating business practices
Government can intervene when a firm has excessive market power.
Breaking up monopolies
Monopolies may be broken up to increase competition.
Blocking mergers
A merger may be blocked if it significantly reduces competition.
Preserving incentives
Mergers may be allowed when they provide benefits to consumers.

Deregulation is the removal of some government controls over a market.

It is intended to promote competition.

Possible effects include:

Characteristic	Perfect Competition	Monopolistic Competition	Oligopoly	Monopoly
Number of firms	Many	Many	Few	One
Product	Identical	Differentiated	Identical or differentiated	Unique
Entry	High	High	Low	Blocked
Price control	None	Some	Considerable	High
Market power	Very low	Low	High	Very high