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An analysis of the strategic behavior of an Oligopoly
|Jazyk:||Počet slov:||1 554|
|Referát vhodný pre:||Stredná odborná škola||Počet A4:||5.1|
|Priemerná známka:||2.98||Rýchle čítanie:||8m 30s|
|Pomalé čítanie:||12m 45s|
Some small firms may operate at the periphery in national markets dominated by a few, with their actions failing to elicit any reactions, but a giant firm must anticipate reactions from its fellows when it introduces a change. The other important thing in rivalry among companies in oligopoly is not just the price war, lowering and rising the prices in need of getting larger slice of market, more important in oligopoly is nonprice competition.
Companies are using their profit an unbelievable amount of money on nonprice competition, which is mainly advertising and product differentiation. Advertising is a very common thing in our lives but if we take a closer look at the advertising we realize that it is mainly these big companies that are making most of the advertising through out the world. It is very important for them because the market has its portions already made and it is very difficult for company to maintain that portion or even take a bigger portion of the market. Advertising is mostly the way to get ahead. They also use product differentiation even on products that are not even different for example they can use advertisement “Old foxes steel is better then any other“. Nonprice competition is actually considered among economists as one of the four oligopoly models. The second one is cartel that I already explained so the third model is kinked demand curve.
The kinked demand curve model oligopolists realize that when one company decrease their prices other companies will follow because they don‘t want to loose their portion of the market. But when one company decides to increase the prices other companies will ignore the prices and hope they can again take part of market with lower demand for goods supplied by company that raised its prices. If the firm cuts its price, their rivals will match the price decrease. A relatively large price decrease will, therefore result in a relatively small increase in sales that is called Inelastic Demand as shown on the graph bellow:
If the firm raises its price, their rivals will respond by ignoring the price change. A relatively small price increase will, therefore, result in a relatively large decrease in sales that is Elastic Demand as shown on the graph:
Firms realize their interdependence and that they will benefit if they cooperate in setting prices. The cooperation need not be through secret deals (although this has happened), because Price Leader may emerge.
Another characteristic of this market structure is "price rigidity".