Market Structures

An oligopolistic market structure is characterized by a handful of firms operating in a tough competitive environment having high influence over each other's pricing. It involves a kinked demand curve, high barriers to entry, high price sensitivity, and sometimes, cartels. Most capital intensive industries tend toward oligopoly. Take the examples of television manufacturing, beverage, electronics, media, food, gaming/gambling, banking etc. (Paul J. Driscoll, 1997)

Since there are a few players in an oligopolistic market structure, and product differentiation is rather difficult. Take the example of our firm Pepsi. Pepsi takes on its only competitor Coca Cola everywhere it can think of; in cinemas, game fields, shopping malls, restaurants, roadsides and lastly, in schools. The major differentiating factor is brand image and maybe product mixes which keeps both firms competing at a breathtaking pace (Pepsi Co holds a total of 31.4% as opposed to Coke's 44.1% of the US beverage industry). As any soft drink fan can tell, both these products are priced similar since product differentiation is low and often the line telling apart the two drinks get blurred, it's impossible for one to increase prices without the other slicing away its market share and losing hard earned customers to the competitor. This gives rise to the trend of forming cartels, which according to US Anti Trust Law, are illegal but many firms (including Pepsi Co and Coke) have been convicted of forming cartels and been charged by law. (Hannaford, 2007)

Question13

There are several types of market structures including perfect competition on one hand and monopoly at the others. The middle lying ones include monopolistic competition in which there are a large number of independent firms that operate. Oligopoly is a small number of firms that own more than 40% of industry. Oligopsony where there are many sellers but few buyers. Natural monopoly where one firms sells at a more efficient and cheap price than any other combination of two or more firms. Monopsony where there is only one buyer such as government bodies.

More common and often observed industry structures include monopoly, oligopoly, perfect competition and monopolistic competition. We are going to look at the way firms in each of these structures maximize profits.

Firms in a perfect competition are subject to pure economic forces, uninterrupted by any other forces. Supply and demand trends determine pricing and both the buyer and the seller take the price as 'given'. Since there's no product differentiation, (as in the case of fruit and vegetable sellers etc) sellers can't charge at their own discretion and substitute products are easily available. Also, it's assumed that buyers have all the information at their disposal and barriers to entry are non-existent. A firm in such a situation maximizes profits where marginal