Difference Between Market Structure And Oligopoly

In the industry, there are many market structures which explains economic models and theories. A market structure portrays competitive relations among firms on either prices or output in an industry. An oligopoly is a market structure dominated by a small number of firms who produce the bulk of the industry’s output. These firms have a high concentration ratio of the given market and consequently have the power to collectively control both the supply and market price in the market. An oligopoly will tend to exhibit unique features which differentiates itself from other market structures which include: - A moderately high barrier for new entrants to prevent dilution of competition. - Product branding through advertising so producers have the …show more content…
In this model, marginal cost equals zero in order to focus on how firms interact around the demand curve, therefore the market demand curve is known by each firm as well as their cost structures. The nature of this model is that each firm takes the other firms output as fixed and then sets its own output quantity. However, the main assumption associated to the Cournot model suggest that firms ignore their interdependence. This means that each firm’s conjectural variation is equaled to zero. The belief is that when a firm set its output, the other firm will not react. To construct the Cournot-Nash equilibrium, the reaction function for each firm will be calculated and superimposed. At this equilibrium, no reason will be justified for either firms to produce differently. Each firm’s reaction function portrays its best response and the firms profit maximizing level at any output produced by its rival. At equilibrium, optimal output produced by each firm is consistent with their best response function as each firm is doing the best it can for itself given what the other firm is doing. However, the assumption that uncertainties does not exist in the Cournot model is misleading. In practice, it is naïve to believe firms will not react to changes in the market, therefore leaving the assumption of zero conjectural variation false. To solve the Cournot …show more content…
In oligopolistic competitive markets, formal and informal collusive behaviours may be practiced by firms as a solution to deal with these different types of uncertainties within the market. Collusive behaviour is said to be a common feature in many oligopolistic markets. The incentive to collude is often explained by various factors. One of the objectives is for both firms to increase its market powers or prevent price/revenue instability in the industry. Firms also seek to achieve joint profit maximization within the market, jointly working together to determine the level of output each firm will produce and/or the price set by each firm. This is done so firms can operate as a monopoly and earn monopoly profits. When collusion occurs, existing firms engage in either two forms of collusive behaviours. These are known as an overt or tacit collusion. Overt collusive behaviour also known as explicit collusion is a formal, usually secret agreement among competing firms in an oligopolistic market designed to control the market and act like a monopoly. This is done to suppress rival competitors as competition within the market erodes profit. The suppression of other competing firms will inevitably increase profits for colluding firms. Cartels are a special case of explicit collusion and this behaviour is deemed illegal