What are the conditions for an oligolpolistic market? How do oligopolies determine the level or output at which they will produce?
I know the three condition for a oligopoly market.
1. There has only a few large firms.
2.Market has high barriers to entry.
3. Firms may produce products that areeither defferantiated or homogeneous.
Is this part correct? I not clear as to the second question.
in 1) I would add the word "dominant" after the word large.
in 3) practically all goods in all markets except monopolies are differentiated or homogeneous. For a third condition of a oligopolistic market, I would add "firms tend to collude.
In part 2, How do oligopolies determine price. There are a number of explanations, and it depends on whether the goods are homogeneous or not. First, is that the firms overtly or covertly collude and set prices. Then, there is the dominant firm model, which says the dominant firm sets the price and the other firms fall in line. There is the Cournot model which suggest each firm tries to estimate what the other firms will do, and then based on this finding, the firm produces to maximize its own profits.
for mor info start here: http://en.wikipedia.org/wiki/Oligopoly
Yes, you are correct about the three conditions for an oligopolistic market:
1. A few large firms: In an oligopoly, there are only a few firms that dominate the market. These firms have significant market power and their actions can have a substantial impact on the overall market dynamics.
2. High barriers to entry: Oligopolies typically have high barriers to entry, which means it is difficult for new firms to join the market and compete with the existing firms. These barriers can include factors such as economies of scale, brand loyalty, patents or copyrights, high initial capital requirements, and government regulations.
3. Differentiated or homogeneous products: Oligopolistic firms can either produce differentiated products, meaning that their products have distinct features or qualities that set them apart from competitors, or they can produce homogeneous products, which are essentially identical to those offered by other firms in the market.
Now, regarding the second part of your question, oligopolies determine the level of output they will produce through a process called strategic decision-making. This involves careful consideration of various factors, including market conditions, competitor actions, and cost structures.
Here are some common strategies used by oligopolistic firms to determine their output levels:
1. Collusion: Oligopolies may engage in collusion, which is an agreement between firms to coordinate their actions and collectively determine the level of output. Collusion can happen through formal agreements (like cartels) or informal understandings. The purpose of collusion is to reduce competition and protect profit margins.
2. Price leadership: In some oligopolies, one firm (usually the largest or most dominant) takes the lead in setting prices. Other firms then follow suit and adjust their prices accordingly. This strategy relies on the assumption that competitors will imitate the price changes of the price leader.
3. Non-price competition: Oligopolistic firms often compete through means other than just price, such as product differentiation, advertising, customer service, or innovation. By offering unique features or benefits, firms can attract customers and maintain market share without solely relying on price adjustments.
It's important to note that the specific method used to determine output can vary depending on the market, industry, and strategic behavior of the individual firms involved. The decision-making process in oligopolistic markets can be complex and dynamic, as firms continually assess and react to market conditions and the actions of their competitors.