ECN607 – Lectureaid_7.2

ECN607 – Lectureaid_7.2 - ECN607 Managerial...

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ECN607 – Managerial Economics Study Aid: lecture 7.2 Oligopoly Oligopoly can be defined as a phenomenon where a handful of sellers dominate an industry. Examples include the airline and cereal industries in the US. Because a few sellers control the market, each firm is aware of the other, and the decisions that one firm makes will impact the others. For example, if one airline lowers fares, other airlines must decide if they will follow suit or risk losing customers to the lower-priced airline. Oligopoly goods and services can be homogeneous or different in some way. Main features of oligopolies include the following: Few sellers : Only a handful of companies exists in the industry and can influence prices. Strategic interdependence : When one firm raises or lowers prices, the other firms must decide whether to follow suit; by not following suit and remaining competitive, they risk losing customers. These are the reasons oligopolies exist: Scale economies : A firm experiences economies of scales when long run average total costs decrease as output increases. Market entry barriers : Government-imposed legal requirements, such as licenses to operate in a certain profession or control of resources such as a diamond mine, can prevent entry into a market. Mergers and acquisitions
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ECN607 – Lectureaid_7.2 - ECN607 Managerial...

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