Chapter 27 Terms 102 - These barriers include legal...

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Oligopoly: An oligopoly is a market structure in which there are very few sellers. Each seller knows the other sellers will react to its changes in prices and quantities. An oligopoly market structure can exist for either a homogeneous or a differentiated product. Small Number o f Firms: An oligopoly exists when the few top firms account for an overwhelming percentage of total industry output. Interdependence: This is also called strategic dependence, which is a situation in which one firm's actions with respect to output, price, quality, advertising, and related changes may be strategically countered by one or more other firms in the industry. Such dependence can only exist when there are a few major firms in an industry. Economies of Scale: The strongest reason that has been offered for the existence of oligopoly is economies of scale. Economies of scale are defined as a production situation in which a doubling of output results in less that a doubling of total costs. Barriers to Entry:
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Unformatted text preview: These barriers include legal barriers, such as patents, and control and ownership over critical supplies. Oligopoly by Merger: A merger is the joining of two of more firms under a single ownership or control. There are two types of mergers. A horizontal merger involves firms producing or selling a similar product. A vertical merger occurs when one firm merges with another from which it purchases an input or to which it sells an output. Concentration Ratio: The percentage of all sales contributed by the leading four or leading eight firms in an industry: sometimes called the industry concentration ratio. Strategic Behavior and Game Theory: When there are relatively few firms in an industry, each reacts to the price, quantity, quality, and new product innovations that the others undertake. Each oligopolist has a reaction function which is the manner in which one oligopolist reacts to a change in price (or output or quality) of another oligopolist. 27...
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