What are cartel agreements key terms oligopolistic

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Unformatted text preview: rn itself into a monopolist. 08 (186-221) EMC Chap 08 11/17/05 5:28 PM Page 211 Focus Questions An Oligopolistic Market What are the characteristics of an oligopolistic market? What are some examples of an oligopolistic market? Are sellers in an oligopolistic market price takers or price searchers? What are cartel agreements? Key Terms oligopolistic market cartel agreement price discrimination Characteristics of an Oligopolistic Market How Much Competition Do Oligopolists Face? The following three conditions characterize an oligopolistic market: The last section developed a way to think about sellers in various markets. We think about, or categorize, sellers according to how much competition they face. In turn, how much competition a seller faces depends on how close to unique a seller’s product is and how easy it is for new sellers to enter the market and compete with it. With this information as background, let’s discuss oligopoly. How close to unique is an oligopolist’s product? According to the conditions that characterize oligopoly, an oligopolist’s product is not unique. Some oligopolists produce an identical good (e.g., steel), and others produce a slightly differentiated product (e.g., cars). We would expect, then, that an oligopolistic seller faces fairly intense competition from current sellers. For example, Ford Motor Company faces stiff competition from General Motors. In the world market for cars, Ford faces extremely stiff competition from Japanese 1. It has few sellers. 2. Firms produce and sell either identical or slightly differentiated products. 3. The barriers to entry are significant, which means that entry into the market is difficult. Exhibit 8-3 lists the conditions that characterize each of the four markets discussed in this chapter. Oligopolistic Firms Are Price Searchers Like monopolistic and monopolistic competitive firms, oligopolistic firms are price searchers. In other words, they have some control over the price they charge. They can raise the price of their good and still sell some of the good they produce (which is not the case for a price taker). oligopolistic market A market structure characterized by (1) few sellers, (2) the production and sale of either identical or slightly differentiated products, and (3) significant barriers to entry. Section 4 An Oligopolistic Market 211 08 (186-221) EMC Chap 08 11/17/05 EXH I BIT 5:28 PM 8-3 Page 212 Conditions That Characterize Conditions That Characterize Various Markets Various Markets Examples of products and services sold in this type of market Number umber of sellers sellers Type Type of product product Barriers Barriers to entry entry Control Control over price price Perfectly Perfectly competitive Many Many Identical Identical No barriers barriers No control No control Wheat, corn, stocks Monopolistic Monopolistic One One Unique Unique Extremely Extremely high barriers high barriers Considerable Considerable amount of of control control Water, electricity, delivery of first-class mail Monopolistic Monopolistic competitive competitive Many Many Slightly Slightly differentiated differentiated No barriers No barriers Yes, Yes, but not as much as as much as in monopoly monopoly Clothing, meals at restaurants Oligopolistic Oligopolistic Few Few Identical or Identical or slightly slightly differentiated differentiated Significantly Significantly high barriers high barriers Yes, Yes, but not as much as as much as in monopoly monopoly Cars, cereal Market Market car companies such as Toyota, Nissan, Honda, and Mitsubishi. Where the oligopolistic seller does not face too much competition is from potential sellers. It is difficult to enter an oligopolistic market, so current oligopolistic sellers are shielded from new sellers to some degree. QUESTION: I always thought that the more sellers in a given market (for example, the more sellers of, say, computers), the more competition in that market. Now it sounds like there can be quite a bit of competition in a market even with only two or three sellers. Is this statement correct? ANSWER: Yes. Competition can exist in a market with three sellers and with 300 sellers. For example, think back to the days of only three television networks: ABC, NBC, and CBS. The three networks stiffly competed with each other. Today more competition in the television market exists largely because of cable. Still, the television market experienced competition before cable. 212 Chapter 8 Competition and Markets Identifying Oligopolistic Industries Economists determine whether a market is oligopolistic by looking at the percentage of sales accounted for by the top four firms in the industry. If only a few firms account for a large percentage of sales, then the market is considered oligopolistic. For example, suppose an industry consists of 10 firms, and the total revenue of the industry is $100 million. The four firms with the highest sales generate $80 million in revenue. In other words, the top four firms account for 80 percent of total revenues in the industry (because $80 million is 80 percent of $100 million), and th...
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