Why are Oligopolies Tempted to Collude Even if it Means Breaking the Essay

Why argon Oligopolies Tempted to Collude Even if it sum Breaking the Law - Essay ExampleA firm achieves maximum profits when it operates where its marginal revenue equals marginal cost (MC=MR). However, it is mostly not as easy as a question of operational at this point the more competition the firm faces, the lesser it will be able to belie the consumers for its own economic gain (Sloman and Wride, 2009). The two extremes in trade structures ar (i) Perfect Competition and (ii) Monopoly. However, in real life, firms a great deal operate somewhere in the middle of these two extremes. Such mart structures are characterized by Imperfect Competition. There are two main kinds of markets that practice imperfect competition (i) noncompetitive Competition and (ii) Oligopolies. Some famous oligopolistic firms are Pepsi, Coke, Nike, Adidas, Reebok and Nintendo (Sloman and Wride, 2009). In an oligopoly, the number of contests is less and limited and there are high barriers which preven t frequent entry of new firms into the market. Barriers of entry may be created in the cast of brand names, sunk costs, firm size, economies of scale, and large firm advantage (Boyes and Melvin, 2009). Competition between firms in an oligopolistic market is high and intense, it sometimes leads to charge wars which become extremely detrimental for their effective functioning. In other instances, these firms hire to collude amongst themselves to minimize the downsides of operating in an oligopolistic market and to simultaneously maximize their profits. The products these firms make whoremonger either be differentiated or homogenous. Depending on the product type, there emerge two distinct kinds of oligopolies sharp oligopolies which produce homogenous products, for example the steel industry. Sometimes, however, an oligopoly may produce differentiated products such oligopolies are called unpurified oligopolies. An example of such an oligopoly would be the automobile industry. T he demand curve for both types of oligopolistic firms is downward sloping and evenhandedly inelastic, there is also a spirit level of dependency on the fightions of competitor firms to price changes. Another anchor feature is mutual interdependence, which means that each firm is affected by the actions of its competitors and thus, whenever any firm is leaving to take an action, it does so with its competitors possible reactions in mind. Due to these circumstances there is a high degree of uncertainty in an oligopolistic industry because firms can never accurately predict how exactly their competitors will react to their actions and this any sort of action involves an inherent degree of risk (Sloman and Wride, 2009). In oligopolistic markets, there is price rigidity because setting product price is not at one firm discretion but a decision in which all firms are factored in. If one firm lowers price below market price, this can cause a price war where all firms start lowering t heir prices to equip the initial settle and this will continue and form a vicious downward price spiral. However, if one firm raises its price above set market price, no other firm will raise its price to match it and the firm who raised prices will lose out as all its customers will shift to competitor firms who have the old, lower price (Bhaskar, 2007). Thus, in an oligopolistic market, prices mostly remain rigid and are not often seen increasing or decreasing as the prices in a perfectly competitive market that respond to the dynamic demand and supply levels. Therefore, the demand curve faces a kink at the existing market price level and market price will not change for small changes in take cost etc. (Sen, 2004). This is shown in the diagram below