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industry is dominated by the top four firms.
It is an example of an oligopolistic market.
Now consider a real-world example. The
U.S. automobile industry is largely made up
of General Motors, Ford Motor Company,
and Chrysler (or DaimlerChrysler) Corporation. Together, these three firms account
for about 90 percent of American-made cars
sold in the United States. Other examples of
oligopolistic markets include industries that
produce cigarettes, tires and inner tubes,
breakfast cereals, farm machinery, and soap
and detergents. 08 (186-221) EMC Chap 08 5/8/06 4:56 PM Page 213 Oligopoly and
over Your Shoulder
Oligopoly differs from other market
structures in terms of the number of sellers.
Both perfectly competitive and monopolistic competitive markets include many sellers, and a monopolistic market has only one
seller. Only an oligopolistic market consists
of a few sellers.
Will a seller act differently if it is one of
only a few sellers than if it is one of many?
Some evidence indicates that when a seller is
one of only a few sellers, it is more likely to
base its behavior on what other sellers do
than if it is one of many sellers. Consider the
airline market, which is considered to be oligopolistic. If one airline lowers its ticket
prices, other airlines are likely to do the same. Cartels
It is easier for the few sellers in an oligopolistic market to get together and discuss
common issues than for the many sellers in
either a perfectly competitive or a monopolistic competitive market to do the same.
Why would sellers that compete with each
other want to get together in the first place?
One of the various reasons may be that they
want to try to eliminate or reduce the competition they present to one another.
Each year, the three major car companies
compete with one another on such things as
price, quality, style, and service. Over the
years they realized that the competition
between them actually helps the car consumer and hurts them. In the boardroom of
one of the car companies, the chief executive
officer (CEO) says, “Every time our competitors lower prices, we have to do the same
thing; every time they come up with a new
sport utility vehicle or a better or safer
sedan, we have to do the same thing. All this
competition is great for the consumer, but
it’s not so good for our profits.”
Suppose the CEO calls a meeting with the
CEOs at the other two major car companies.
They get together for a nice lunch somewhere and talk over their problems. At the
end of the lunch they all agree that the com- The cereal market is an oligopolistic market. Can you name the
firms that dominate this market? petition among them is helpful to consumers
but not so helpful to them, so they should try
to reduce some of this competition.
Specifically, they decide to keep prices where
they currently are (no more discounts) and
to stop coming up with new car models for
the next two years.
The three CEOs have entered into a cartel
agreement, an agreement that specifies that
they will act in a coordinated way to reduce
the competition among them and (they
hope) raise their profits. In the United States,
cartel agreements are illegal. But suppose
that they were not illegal, so nothing prevented the CEOs from making the cartel
agreement. What then? Many people would
say that the CEOs would be successful at
reducing their competition and increasing
their profits. In other words, the cartel agreement would harm consumers and help the
three car companies.
This answer assumes that the three car
companies would actually hold to the cartel
agreement. However, firms that enter into
cartel agreements often break them. To see
why, put yourself in the place of one of the cartel agreement
An agreement that specifies how the firms that
entered into the agreement will act in a coordinated way to reduce the
them. Section 4 An Oligopolistic Market 213 08 (186-221) EMC Chap 08 11/17/05 5:28 PM Page 214 Even if cartel agreements were not illegal,
they probably would not be much of a problem for consumers. Certainly sellers in the
same market might try to make cartel agreements and would want them to hold, but it
is not likely that they would hold. After all,
once the agreement was made, each seller
that entered into it would feel a sharp monetary incentive to break it and make itself
much better off at the expense of its competitors. It’s nearly impossible for companies
to turn their backs on the chance to get rid
of their competition. The Organization of Petroleum Exporting Countries (OPEC) is a cartel.
Here OPEC president, Indonesian oil minister Purnomo Yusgiantoro,
opens an OPEC meeting at its headquarters in Vienna. Why do you
think cartels are illegal in the United States? three automobile company CEOs. You
return to your office after lunch with the
other CEOs. You start to think about the
cartel agreement you just entered into and
say to yourself, “I know I promised not to
lower prices and not to
“People of the same trade develop any new model cars,
seldom meet together, even but suppose I...
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