What keeps oligopolies from becoming a monopoly? Why don't the firms join to dominate the market?
I know what oligopolies means:
There are three conditions in a oligolopolistic market place.
There has only a few large dominant firms.
Market has high barriers to entry.
Firms may produce products that are either defferantiated or homogeneous and firms tend to collude.
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 the set prices. Then, there is the dominant firm model, which says the dominant firm sets the proces and the other firms fal 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.
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This is probably oversimplistic -- but why should oligolopolistic firms merge if they're making a decent profit on their own?
Antitrust laws often keep such mergers from happening.
Further, if the firms are successfully colluding, then they are already maximizing combined profits; a monopoly gets them nothing.
In the context of an oligopoly, where there are only a few dominant firms in the market, several factors can prevent them from forming a monopoly and joining together to dominate the market completely. Here are a few key reasons:
1. Competition: Even though there are only a few firms, they still face competition from each other. Oligopolistic firms are aware that if they collude and set high prices, new competitors may enter the market to offer lower prices and gain a competitive edge. The fear of potential competition keeps the firms on their toes and prevents them from fully monopolizing the market.
2. Antitrust Laws and Regulations: Most countries have antitrust laws and regulations in place to prevent firms from engaging in anti-competitive practices, such as collusion or mergers that would create a monopoly. These laws aim to ensure fair competition and protect consumers' interests. If firms in an oligopoly attempt to merge or conspire to form a monopoly, they may face legal repercussions and regulatory scrutiny.
3. Disagreement and Self-interest: Each firm in an oligopoly typically has its own goals, strategies, and desired market position. It is not uncommon for firms in an oligopoly to have different perspectives, which can lead to disagreements and conflicts of interest when it comes to joining forces. Each firm wants to maximize its own profits and market share, which may not align with the interests of other firms. This inherent self-interest often prevents full cooperation and market domination.
4. Differing Product Offerings: Oligopolistic firms may differentiate their products or services to target different customer segments or meet specific market demands. This differentiation adds variety to the market and allows consumers to have choices. If firms were to merge or collude, they would likely have to standardize their products, reducing consumer choice and potentially damaging their own competitive advantage.
5. Uncertainty and Risk: In many cases, firms in an oligopoly may face uncertainty about future market conditions, consumer behavior, or technological advancements. This uncertainty makes it challenging for them to make long-term commitments or engage in collusive behavior. Firms may be hesitant to merge or join forces due to the risks involved in giving up their individual market control and flexibility.
Overall, the presence of competition, legal barriers, differing interests, product differentiation, and risk factors all contribute to keeping oligopolies from becoming monopolies. These factors ensure that multiple firms continue to exist and strive for market dominance, leading to a more competitive marketplace.