Which helps enable an oligopoly to form within a market?
Which helps enable an oligopoly to form within a market?
- Costs of starting a competing business are too high.
- The government restricts market entry.
- The number of options in a market confuses consumers.
- No competition exists between producers.
Answer; (A) Costs of starting a competing business are too high
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What is an oligopoly?
An oligopoly is a market or industry with a few large companies (or firms) who control a large percentage of the market share. There can be many small oligopolies in an industry, but the term “oligopoly” is usually used for those industries with four or fewer firms.
An oligopoly is not to be confused with a monopoly, which has to do with government-granted rights over an entire industry. An oligopoly is the result of market competition, where the few large companies came to dominate their industry through natural or artificial means.
In some cases, a small number of firms may hold a large percentage of an entire industry’s market share after years of success in that field. This can largely be attributed to high demand for a particular product or service in the industry, which allows them to charge premium rates for their product or service, and prices that are too expensive for new entrants into their market who might otherwise undercut their profit margins.
What is an oligopoly market?
An oligopoly market is highly competitive with relatively few sellers dominating the sales of a particular product or service. Market demand for that product or service is mostly driven by the largest companies in the industry, as they negotiate with sellers over prices and distribution volumes.
An oligopolistic market naturally leads to large quantities of both innovation and sheer confusion. Buyers within an oligopoly are unable to compare their choices simply by price alone, since firms have different capacities to produce goods or services, resulting in no single seller having a “clear market leader”.
What Are The Characteristics of Oligopoly?
The characteristics of an oligopoly include:
1. Few sellers
Oligopolies are commonly found in marketplaces where there are few sellers and relatively high competition. The reason there are so few sellers is because the new entrants into the market face certain barriers to entry, including the inability to access resources (e.g., raw materials) or the inability to gain the capital needed for expansion.
2. Barriers to entry
Most industries have barriers applied to new entrants. To be able to compete, a new entrant must have resources (e.g., raw materials, money) and a supply chain that allows them to compete with the existing sellers in the industry.
Many oligopoly markets include high barriers to entry, which are mainly due to the cost of starting up production; resources such as land and labor are almost impossible for new entrants to acquire.
In an oligopoly, there is a high degree of interdependence between each seller in the market. The sense of interdependence arises from each seller’s position in the value chain, as well as their ability to interact with other sellers.
For example, a single firm producing pharmaceuticals may be unable to control the supply of raw materials or skilled workers. In order to be able to operate in this industry, they must have significant resources and the ability to purchase key materials and supply chain services from other firms operating within this industry.
4. Prevalent advertising
Oligopolies commonly exhibit high levels of advertising to convince consumers that the product/service is useful and necessary. Due to high barriers to entry, oligopoly markets are often dominated by large firms, allowing them to spend a large amount of money on marketing campaigns.
What Are The Conditions For an Oligopolistic Market Structure?
Few conditions must prevail for an oligopoly to exist. The conditions include:
1. High entry costs in capital expenditures
In order to enter an industry, companies must spend money on capital. Capital is the equipment, buildings, computer systems, and other resources necessary to provide goods and services. The primary obstacle to new entrants into an oligopoly is the high cost of entry in capital expenditures.
2. Legal privilege
A firm with the legal right to compete in an oligopoly is difficult for an outside company to enter without facing the possibility of either legal or financial ruin. For example, a large corporation can take over another firm’s assets and properties so that it can use the resources of that firm to compete against new entrants.
3. A platform that gains value with more customers
One way that a big firm can gain market share and secure its position in an oligopolistic market is through network effects.
A company with a platform-based product can develop a larger user base and secure its dominance in the market over time. This is because once this large group of users has been brought into the company’s network, there are fewer potential customers for multiple companies to compete against each other.
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Is Netflix’s business model an oligopoly industry?
Netflix is in an oligopoly market because there are only a few other major companies that provide streaming services, like Hulu and Amazon Prime video.
Netflix has become a giant in the video industry by providing a platform for users to watch television shows and movies over the internet.
The company is using network effects to gain share in the online movie and television show market, by spending millions of dollars on making its own original TV shows and movies, in addition to licensing content from third-party producers.
Negative Effects of an Oligopoly?
Oligopoly can benefit the market when it is efficient and produces quality goods at affordable prices, but in many cases, it can cause harm. The negative effects of oligopolies include:
1. Price fixing
Producers in an oligopoly often collude to keep prices high. When this collision occurs, it is called price fixing, and it is illegal.
2. Lower quality products or services
When there are fewer firms in a market, companies tend to produce lower quality products because there are less competitors to make them improve the quality of their products.
3. Monopolistic control of the market
Because oligopoly companies have control over the market, they can manipulate prices and restrict the output of goods and services. This leads to the formation of a monopoly, which is a market structure in which there is only one firm that produces all products or services in the market.
Example of a Current Oligopoly?
Current oligopolies in the market include:
2. Charter Communications (CHTR)
3. AT&T (T)
Why is Oligopoly Bad?
Oligopolies are bad for consumers because they put power into the hands of a few companies. If a few oligopolies control many industries, then the market can be easily monopolized and prices can rise. This happens when the producers in an industry come together to collude and agree on how to price their products and services.
The product becomes too expensive or is not of good quality because there are too few firms competing in the market, and companies collude so that they can keep prices high.
Why Does an Oligopoly Exist?
An oligopoly exists because a few producers control the output and supply of products or services in an industry. This happens when there are a limited number of firms in a market, and these firms have significant control over their industries.
How do markets become oligopolies?
What Strategies Do Oligopolies Use?
Oligopolies use a number of strategies in the market, including:
1. Price wars: This is when firms in an industry reduce prices to undercut competitors and gain market share.
2. Predatory pricing: This is when a firm lowers its prices below cost to eliminate competitors from the market.
3. Product differentiation: This is when companies differentiate their products or services by making them unique so that consumers will prefer one company’s products to another’s.
How does the dominant seller maintain their dominance in the oligopolistic market?
This happens when the dominant seller has many ways of keeping their customers loyal to them. This can be done in many ways, such as providing special deals and incentives to retain customers, giving out free samples, and advertising their products, making them more attractive.
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