Oligopoly Explanation, Essay Example

Oligopolies as a form of market in a certain society can possess both negative and positive characteristics – everything depends on the structure of the oligopoly and on the strategies that each of them follows in the market. The usual situation with oligopolies is a positive one because under the condition of existence of few firms acting in the same sphere of business all of them are interested in keeping the balance between their output and sales, thus choosing the reasonable pricing and production policies. Each firm gets sufficient profit and takes care about the overall stability in the market. The fact that price reduction or raise committed by one firm will inevitably cause the corresponding actions from other participants of the market usually withholds such drastic actions from each of them.

However, the situation may turn out to be negative for the community in which the firms function if they conclude an agreement and raise prices, simultaneously restricting entry of other competitive firms into the market. In such cases the community usually suffers from the unexpected and unjustified price increases, having no alternative of obtaining the products produced by those firms.

Speaking about the described situation in the beer industry with one firm producing 90 units and another one – 10 units, the incentives to lower the price may appear only in the firm that produces 90 units. The reason for this is that in oligopolistic markets price reduction will inevitably cause the reduction of profit, and this is what only the firm with the higher volume of sales can afford. This is why it appears that the firm producing 90% of the total amount of products in a certain market appears to be the dominant firm; it is up to the administration of that firm to change pricing policies, because the firm getting only 10% of total revenues cannot bear the burden of price reduction in the market.