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Essay on Microeconomics
Oligopoly: An `Introduction
Importance now focuses on market structures where only a few firms vie. Market structures studied so far have generally been competitive or monopolies. Neither of these assumptions rationally describes many markets. Monopoly structures involve a complete absence of struggle, an extreme assumption. In competitive structures, by contrast, there are so many sellers and buyers that no individual believes their pricing and output decisions will affect overall market price or volume. In a relatively small economy like Australia there are many industries where markets are dominated by only a few firms. Then one firm’s choice of price or output policy will depend on the policies of its rivals. Cowling (1982) defines the degree of monopoly as the "mark-up of price on marginal cost.
Strategic business management theory suggests that the first firm in business in a market may have the so-called "first mover advantage" over later entrants, because it can build a foundation of market share, establish a reputation and enjoy lower costs due to the downward-sloping experience curve (Pearce & Robinson, 1985).
In a nutshell, the rationale of price and output policies in such an industry is a strategic problem. Briefly, the decision problems of individual firms are interdependent. Such industry structures are termed oligopolies. Oligopoly is one of the most appealing market structures to study for the reason that each firm's actions and the interaction of firm behavior affect market outcomes.
In the Cournot model, firms choose quantity based on their contender's given levels of output. Each firm earns some economic profits. Bertrand competitors, in contrast, set prices given their rivals' prices. For the case of homogeneous products, they end up charging a price equal to their marginal cost and earn zero economic profits. Oligopolists believe their competitors will follow price decreases..........
