CHAPTER 12 - OLIGOPOLY
Market or industry dominated by a small number of firms, whose decisions (price, output,
Firms in oligopolistic markets face strategic decision-making, and must constantly take into account
the behaviors and reactions of its rivals. In contrast, a) a pure monopoly does not have competitors to
worry about; and b) under perfect competition, each firm is so small relative to the market, industry
price and output are set by supply and demand, so that a firm's competitive options are strictly limited.
an individual farmer raising corn or producing milk.
Under oligopoly, a firm's profits depend on its own actions and the actions/reactions of rivals. Firms
must engage in
interactive or strategic
thinking. For example, think of strategic decision-making at
Northwest Airlines, GM, Sprint, Burger King, etc.
Issues: What is a "small" number of firms? How to measure the degree of oligopoly, concentration?
Concentration Ratio (CR):
One measure of industry concentration, see p. 474-475, Table 12.1.
= % of Total Industry Sales accounted for by the four largest firms.
= % of Total Industry Sales accounted for by the eight largest firms.
= % of Total Industry Sales accounted for by the twenty largest firms, etc.
The higher the CR, the greater the degree of market power by a small number of firms. Benchmarks:
> 90% (only 2-3% of GDP)
< 40% (top four firms have individual markets shares averaging less
than 10%). 75% of GDP
40% < CR
< 60% (monopolistic competition) 12% of GDP
> 60% (10% of GDP)
Limitations of CR (Census Bureau data):
1. What is the relevant "market," and is it a broad or narrow? The more broadly (narrowly) defined the
market is, the lower (higher) the CR. For example, is Coca-Cola in the "soft drink" market (narrow), or
in the "beverage" industry (broad). Is Alcoa in the "aluminum" industry or the "metal" industry? Is
Budweiser in the "beer" industry or the "adult beverage" industry?
The relevant market has been an issue in the Microsoft case. Is the market "information appliances" or
"single-user, Intel-based desktop computers?" Experts now forecast that there will soon be more non-
PC Internet devices (hand-held and notebook-style information appliance devices) sold than PCs, so
ECN 469: Managerial Economics – CH 12
Professor Mark J. Perry