The companies that are part of an oligopoly keep track of the other companies to see if anything has changed within them. These can include pricing (cars, cable etc.) or policies (credit cards, airlines etc.) Many times consumers don’t even notice the brand as long as its good and cheaper which is why oligopolies try to keep their brands price closer to the other companies brands in the same industry.
Oligopolies themselves are interdependent. So when one changes the price the other companies have to watch what they do. The problem for consumers and the producers are when they lower prices. The demand curve goes down when one company lowers prices which in the graphs we see are kinked curves. The marginal revenue also kinks downwards therefore, the marginal revenue disappears and the marginal revenue stays the same because the marginal cost stay the same If marginal cost doesn’t matter at a certain point such as when they are priced similarly then the demand curve intersect and they could both be profitable.
Which why when one company that is part of an oligopoly drops their price so do the others. And although they don’t directly set the price of the other companies that's what they end up doing. It become illegal when the oligopolies get together and set a price. For example, if Universal and Disney meet up and set a price for consumers.
The similar price doesn’t help the consumer in anyway it is too similar to a monopoly the only difference is that Disney and Universal can say no to other competitors, in a Monopoly others can enter and exit the industry easier. Monopolies essentially set the price and so do oligopolies which leaves the consumer at a disadvantage whether the industry is a monopoly or oligopoly.
It is important to note that while the low price helps consumers usually, when the oligopolies work together and raise prices, this is bad for the consumers. This is called collusion, and it is illegal in the United States. When collusion occurs, all the companies that make up an oligopoly raise prices at the same time. When the companies work in unison, the consumer is powerless because they have no choice where they can purchase at a low price. In this scenario, oligopolies do behave like one big monopoly.
ReplyDeleteGreat post Padmini! I agree with you and Teagan and your observations as to how oligopolies tend to behave like different parts of a giant monopoly. I think a great example of this is the telephone service industry. The big four of that industry always seem to be making prices very similar and trying to offer new promotions that keep them in competition with each other.
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