Competitive Oligology Industries - Research Paper Example

Competitive Oligopoly Industries al Affiliation Competitive Oligopoly Industries Introduction Oligopoly refers to situation where market control is under a small group of firms. It is an economic situation where there are limited independent suppliers of a given product whose competitive pricing rarely occurs according to Pitelis and Sugden (2000). Oligopoly mostly resembles monopoly where a company puts control over large portion of the market. In the oligopoly market, however, there are at least two firms which exert control over the market.

For instance, the retail gas market is an example of an oligopoly since a large part of the market is under the control of a few firms. In the oligopoly situation, the market is dominated by a few suppliers and/or sellers known as Oligopolists as noted by Pindyck and Rubinfeld (2001). The few businesses controlling the market have control over the pricing of products. Industry Analyses An analysis of four industries using data retrieved from the U.S. Census Bureau. The data analysed was for the following industries fluid milk (311511), women's and girl’s cut & sew dresses (315233), envelopes (322232), and electronic computers (334111) according to the Census for Manufacturing (NAICS 31-33).

For easier analysis and presentation, the values for the industries have been tabulated as follows. Table 1: Industry& Code Concentration ratio CR4   Concentration ratio CR8 Herfindahl~ Herschmann index (HHI) for 50 largest companies3 Concentration Level Based on CR4 Fluid milk (311511), 21.3 31.0 204.6 (Unconcentrated) perfect competition Women's and girl’s cut & sew dresses (315233), 14.2 23.7 111.3 (Unconcentrated) perfect competition Envelopes (322232) 40.9 56.4 564.5 (Unconcentrated) oligopoly Electronic computers (334111) 45.4 68.5 727.

9 (Unconcentrated) oligopoly CR4 Key Total concentration: 100% means an extremely concentrated oligopoly. CR1= 100%, implies a monopoly. High concentration: 80% - 100%. Oligopoly or monopoly Medium concentration: 50% - 80% - an oligopoly. Low concentration: 0 % - 50% - perfect competition or oligopoly (oligopoly emerges close to or at the upper end) No concentration: 0% means perfect competition or at the very least monopolistic competition Based on the table above and the key that immediately follows, it is established that based on the Four-Firm Concentration Ratios, only two of the four industries seem to be in the oligopoly market (Envelopes (322232) and Electronic computers (334111)).

 This is so considering that they have CR4 ratios between 0% and 50%, their percentages tending toward the upper end. Electronic computer companies that dominate the U.S. market include Dell, Compaq HP, Lenovo, IBM and Apple. Enveolpe manufacturers dominating the US market include Tension Corporation, National Envelope Corporation, Sheppard Envelope Manufacturing and Empire Envelopes Advantages of Oligopoly There are several advantages associated with oligopolies as noted by Pindyck and Rubinfeld (2001).

First, there are large firms which strongly hold the market hence are able to make high profits as market players are few. Also, in most cases, products of two competing companies are the resultant of one big firm. Hence, whether one company earns profit or other, the profit is meant for the parent firm. Furthermore, companies in oligopolistic markets are capable of deciding prices of their choice as they have full control over the market. Yet again, the companies make huge profits which can be applied in developing other products, for innovation purpose, and for other business processes.

In addition, oligopoly assists in reducing the standard cost of goods production since firms producing the same types of products can collaborate and produce those goods together. Prevailing market players are capable of making long-term profits incase of an oligopolistic situation. This happens because the market never gives chance to the old business to raise its share. It also ensures that incoming players do not enter the market by imposing many obstacles of entrance. In an oligopoly market, customers are usually able to plan and stabilize their expenditure due to the stable prices that exist in the market.

Moreover, customers are able to compare the prices of products more easily as there are few players in the market (Pindyck and Rubinfeld, 2001). This easy comparison of prices demands companies to position their prices in a competitive so that customers can respond positively. Disadvantages of Oligopoly The oligopoly market is also associated with a number of disadvantages according to Pindyck and Rubinfeld (2001). For one, the issue of the firms setting the prices might be a benefit; however, if they are set unrealistically, this can prove a big blow to the customers.

Due to the fact that large firms control the major players of the oligopolistic market, the dreams and strategies of small businesses in this market are likely to remain unrealized (Pindyck and Rubinfeld, 2001). Also, the little competition existing between oligopolistic companies is disadvantageous as it leads to less improvement of products. This negatively affects consumer consumption according to Hirschey (2008). Furthermore, it is hard for companies to undertake independent decisions as they always have to reflect on the ideas of other prevailing players in the market.

Yet again, in an oligopoly, it is hard for new firms to enter the market owing to the barriers exerted by the dominant market players. Lastly, maximum profits are usually made by the major players in his market hence the micro-economic objective of fair distribution of wealth is not accomplished. As a result, the small business players gain little profits. Conclusion An oligopoly market is one that is dominated by a few firms. The firms therefore hold a significant level of controlling the market making it difficult to penetrate for new entrants.

Generally, oligopolies are not good for the customer in as much as they are good for the firms that offer products and services. For example, in the computer industry, the few dominant players set the trend and market prices which are normally higher than they would be in a competitive market. References Hirschey, M.(2008) Managerial economics. Auckland: Cengage Learning Pitelis,C. & Sugden. R. (2000) The nature of the transnational firm .London: Routledge. Pindyck, R. & Rubinfeld, D. (2001) Microeconomics 5th ed. New York. Prentice-Hall. U.S.

Department of Commerce Economics and Statistics Administration (2001) Concentration Ratios in Manufacturing. U.S. Census Bureau Issued June 2001 EC97M31S-CR. Retrieved from http://www.census.gov/prod/ec97/m31s-cr.pdf