What is a Oligopoly? How does it work in our society?
- What is an Oligopoly and how does it work?
An Oligopoly is a market which independent sellers are few. Oligopoly acts very much like a monopoly in which one company exerts control over most of the market, but the only difference between them is that oligopoly have least 2 firms in the market that sells slightly different products. Since Oligopolist's has very few competitors in the market, market competition are fiece because each firms are large enough to affect each other significantly. Oligopoly market primarily focuses on being interdependent. When a firm is being interdependent, their decision is based on upon how the other firms behave. If the first firm was to increase their price on the product, then consumers would buy the other firms, therefore that first firm's marketshare would decrease, and revenue would decrease from increasing price. If the first firm cut back its prices, then it will increase their marketshare, however it is unlikely that other firms will let this happen, so they will end up cutting back their prices too. Demand will end up inelastic and it will increase a little bit. Since it is hard to become efficient in an oligopoly, the chances to collude with other firms are possible.
- How do we know when an Oligopoly exits?
The New York Times explains how the three big beer companies are raising their prices at the same time, during a recession, and when the demand for beer is decreasing. With 80 percent of market between them, they are just asking to get a accusation from the Department of Justice. You can just tell that they are Oligopoly markets because they show obvious signs that they are working as a cartel. To actually determine when Oligopoly exits in the market, we measure its market power. To measure it's market power, we use the Concertration Ratio that indicates the market power that measures the size of firms to the size of the market (It's ussually the first 4 largest). Herfindahl-Hirschman Index (HHI), can also determine if an Oligopoly exits in the market. HHI measures the industry concentration that accounts for number of firms and size of each. The U.S Justice Department policy considers the result of 1800 be an Oligopoly.
- Pepsico Swot Analysis 2013, Pros and Cons
In Pepsi's Swot Analysis, It shows their Strength and Weaknesses. For strength they reported that they have 22 brands earning more than $1 billion a year. In Oligopoly, high profits generated by the companies can be used for innovation and development of new products and processes. Another strength pepsi reported in the Anyalysis was that they had a successful marketing and advertising campaigns. They probably thrived in the market because in Oligopoly competition, dominant market players usually make long-term profits in an oligopolistic environment. This is possible because the market does not allow an old business to increase its share. It also prevents new players from entering the marke through several barriers of entry. For Pepsi's Swot Analysis, for their weakness, they reported that they priced their products too low. In an Oligopolisitic market, because Firms cut their prices in response to price cut in other firms, Pepsi cannot increase their price because it would decrease their market share. Another weakness Pepsi reported was how they believed to recieve a low of a profit margin. A lower profit margin occurs in an oligopoly when one firm cut its price and the other follows which ends up retaining around the same share of the market as before.
What were the reasons for instituting AntiTrust Laws?
- Why were AntiTrust Laws created in the first place?
The Federal and the State government has introduced AntiTrust Laws so that consumers can recieve products at reasonable prices. In doing so, the AntiTrust Laws prevented Large companies from becoming too large, and they also ensured that fixing prices were not allowed. These laws have also given businisses equal opportunity to compete in the market.
- Clayton Act and Sherman AntiTrust Law
The Sherman AntiTrust Law was enacted in 1890 and it's purpose was to prevent corporate monopolies or attempts at monopolization. This act includes contracts of restraining free trade and protects consumers from unfair business practices. The two types of trade restraints Sherman AntiTrust Law went over was the vertical and horizontal agreement. The Vertical Agreement talked about preventing the use of price fixing, and the Horizonal Agreement talked about preventing the use of agreement between the buyer and seller. In 1914 the Clayton Act was enacted to stregthen the the AntiTrust Laws that were placed by the Sherman AntiTrust Laws. It provided more details to prohibit anti-competitive price discriminations, it gave consumers more rights to sue for damages, and it kept corporations from making illegal practices.
- Recent AntiTrust Showcase: U.S vs. Microsoft
In 2001, The Department of Justice had accused Microsoft of becoming a Monopoly, and engaging in illegal practices in contrary to the Sherman AntiTrust Law. ''Microsoft has been held accountable for its illegal conduct by a court of law,'' the attorney general said. ''We are pleased that the court agreed with the department that Microsoft abused its monopoly power, that it violated the antitrust laws and that it harmed consumers.''
Coordination Problems
- Inherent conflict in the joint and individual interests of oligopolists.
There are two goals Oligopolists want, first is to maximize their profit, and the second is to maximize market share. However, these two goals conflict with each other because in order to reach both goals, the oligolpolistic firm must take the risk that might end up lowering their profit while the other oligopolist firms match price cuts that are just designed in doing that. In the New York Times, it talks about how the three biggest beer companies are hinting to the world that they are colluding with one another. According to the news, The three major beer companies are all increasing their price of their products at the same time, during a recession, and when the demand for beers are in a downfall. It is hard to achieve effiency in an Oligopolistic competition, and because it is hard, many firms will work as a cartel.
- Price leadership
In Trevis Article, it talks about how Walmart is considered to be in the Price leadership, and how its helping out the tough economy. Price leadership is when a firm that is the leader in its sector determines the price of goods or services. Price leadership can leave the leader's rivals with little choice but to follow its lead and match these prices if they are to hold onto their market share. Walmart has become the price leadership in its industry by cutting back products on low prices, and its successfully cost saving to customers. As the result, it is considered the largest retailer in the world with more than $445 billion in revenues. Price leadership is considered to be a coordination problem for most firms because all firms below the leader of the dominant firm has to follow and respond to changes from the biggest firm.
- Allocation in Market Share
In the Chicago Tribune Article, it talks about how the three major airlines have been accused of Predatory Pricing. Predatory Pricing is considered to be a coordinate problem because it often occurs when market shares are not being divided in a manner satisfactory to an oligopolist. Predatory Price reductions are designed to drive out other small competition by lowering their prices so low that other firms won't have the chance to compete. The Northwest Airline has been accused three times over the past two years for Predatory Pricing and had been also sued for driving out Reno Airlines out of market. The Northwest Airline Spokesman denies slashing prices on their tickets, and he says, "Our goal is to compete fairly and vigorously."
What is Game Theory?
- How did Game Theory come about, and what is its purpose? More Information about game theory.
In the Economic Times Article, it talks about the person who first invented the game theory, and how did it came about. Many people in the popular perception still believes that John Nash was regarded as the father of the game theory, but when in fact that John von Neumann and Oskar Morgenstern was the first ones to invent the mathematical game theory in 1944. Game Theory was created to analyse what measures of action certain people would make in social and economic situations. The game theory analyses each of the player's moves and strategies available to them in order to achieve the best possible outcome for themselves. This game theory relates with Oligopoly because independent firms in the market must respond accordingly and appropriately to other firm's action.
- Prisoner's Dilemma
You and your friend had been caught red handed, and you have 2 choices that have 4 different outcomes. If you confess, and your friend doesnt then you will be set free and your friend will spend 10 years in jail. However, if you and your friend both confess then you both will spend 8 years in jail. If you decide not to confess and your friend confesses, then you will spend 10 years in jail while your friend is set free. If you both don't confess then both of you will spend 30 days in jail. Will you choose to betray your friend or will you take the chance of staying mutal? This is what a Prisoner's Dilemma is. In the long run, both subjects will want to cooperate and stay mutual, but each subject will have the overpowering tempation to betray each other. In an economic way of thinking, people think for their own sake, and they take actions on what they may believe what the other person might choose. In an economic way of thinking, it is ussually the case that you would confess because if you add up all the points, confessing is lower than to not confess. Prisoner's Dilemma has been around more than 3 decades, and it has been invented by two scientists at the Rand Corporation. It first began in 1978 and Dr. Axelrod had decided to run the Prisoner's Dilemma experiments through inputting tiny programs through a computers and he pitted against thtem through series of tournaments. Prisoner's Dilemma is important to Oligopoly because that is how most of the firms in the market work.
- Game Theory: The game of the Anti-Social Gaming
An iphone word game called "Letterpress" works in a very similar fashion as to how the game theory works. Letterpress is played in an one-on-one asynchronous manner. When the first player completes a turn the second player must wait for the first player to go before it’s his turn again. This allows the player to take a turn anywhere, anytime. Letterpress functions like the game theory because like in the game, an independent firm in the market must wait for the other firms to make a move first and then they decide what moves they need to counterback.
What is the great price conspiracy?
- What is the Great Price Conspiracy?
In 1950, a General Electric Company was fined for having numerous account of violations that went against the Antitrust Laws. The General Electric Company scandal was so overwhelming that they decided to call it the Great Price Conspiracy. The assistant Attorney General in charge of the AntiTrust division "cited the General Electric Company as the 'number one example' of companies which have made earnest efforts to live up to the antitrust laws."' The Electric Company was fined for numerous price fixing, having identical secrect bids, and even there have been 24 instances of having identical secret bids over a 3 year period. Overall the Annual Sales involved 270 million dollars, or more than 1 billion that was accounted for the entire conspiracy.
- What was the outcome and result?
As for the result, 29 companies that were involved with the conspiracy was fined more than than 1.9 million dollars. The thirty defendants out of fifty-two wre given jail sentences, and only seven recieved a 30 day period in jail. The remainder recieved suspended sentences with longer probations. I thought it was incredible how the Electric company was able to cheat its way out of the system for so long.
- Why is this conspiracy significant?
I believe that the Great Price Conspiracy scandal was so overwhelming that it made a significant impact onto the Justice of Department, and to the world because it shows that there are firms out in the business world that will take drastic actions just so they can maximize their profits. It made a significant impact onto the Justice of Department because it showed that their system had a loophole and a major breakthrough. This conspiracy has also impacted the world because other firms that competed with the Electrical Company had an unfair advantage. Oligopolistic Firms today are now well aware of consequences of going against the AntiTrust Laws and this conspiracy is a perfect example.