Oligopoly is the ideal market structure because it allows society to Essay

Oligopoly is the ideal market structure because it allows society to benefit from the efficiency gains of both competition and monopoly - Essay Example The range within which each oligopolist can independently influence prices is, however, narrower than where there is a pure monopoly, for he has to take into account not only the availability of substitutes (as does a pure monopolist as well), but also the likely actions of his principal competitors in his own market. In all circumstances price changes are likely to affect adversely the interests of certain participants in the market. Increases in price naturally are harmful to consumers, while decreases injure the interests of producers and of some traders. In monopoly and oligopoly situations the power of firms to influence prices, coupled with a high degree of dependence on these firms, tends to provoke allegations that all price changes are deliberately engineered to injure certain interests. Consumers, producers or rival traders may consider that they have been specially and deliberately injured by the actions of the monopolist or oligopolists, and may ascribe market changes to their intentional activities. Plausibility is lent to these views because in these situations the firms can undoubtedly influence the market; indeed, they cannot help doing so. It is therefore impossible conclusively or convincingly to refute allegations of profiteering, of destructive underselling to eliminate partic ular competitors, of deliberate depression of producer prices, or of wasteful inflation of costs. 1 An important and distinctive characteristic of oligopoly is the realization by each firm that its fortunes depend very closely upon the actions of the others in the same market. Their behaviour is necessarily influenced by the realization of mutual interdependence. Each firm appreciates that in initiating price changes it must expect the other firms to react to these changes, and that in assessing the net effects of a price change it must take account of the probable reaction of others. In deciding on price changes each firm considers not only the general market situation and its own financial and stock position, but also the probable conduct of its principal competitors. Firms recognizing their mutual interdependence may find it convenient and profitable to co-ordinate their policies and to act together, and co-operation is made easier because the numbers are comparatively small. An oligopolistic situation is frequently accompanied by market sharing arrangements between a number of producers or firms. This is particularly likely in the supply of standardized products or services, where these price-fixing agreements may be effective and stable even without formal market-sharing arrangements; banking and shipping provide familiar examples in the United States, in Britain and in Western Europe. Where the product is largely unstandardized, agreements are less often concluded, and, moreover, tend to be unstable; the motor industry seems to be a convenient example. Co-operation is, however, by no means the inevitable outcome of oligopoly. Individual firms may decide to try their strength and to enlarge their share in the market by active competition. Moreover, when new entry is