![]() Many of these costs are sunk costs, which are costs that cannot be recovered when a firm leaves a market, and include marketing and advertising costs and other fixed costs. High set-up costs deter initial market entry, because they increase break-even output, and delay the possibility of making profits. Owning scarce resources that other firms would like to use creates a considerable barrier to entry, such as an airline controlling access to an airport. Ownership or control of a key scarce resource If a market has significant economies of scale that have already been exploited by the incumbents, new entrants are deterred. Natural entry barriers include: Economies of large scale production. These hurdles are called barriers to entry and the incumbent can erect them deliberately, or they can exploit natural barriers that exist. Oligopolies and monopolies frequently maintain their position of dominance in a market might because it is too costly or difficult for potential rivals to enter the market. 2nd mover advantage occurs when it pays to wait and see what new strategies are launched by rivals, and then try to improve on them or find ways to undermine them. Sometimes it pays to go first because a firm can generate head-start profits. The advantages of ‘going first’ or ‘going second’ are respectively called 1st and 2nd-mover advantage. Whether to be the first firm to implement a new strategy, or whether to wait and see what rivals do.Whether to raise or lower price, or keep price constant. ![]() Whether to compete with rivals, or collude with them.Oligopolists have to make critical strategic decisions, such as: In other words, they need to plan, and work out a range of possible options based on how they think rivals might react. ![]() Because firms cannot act independently, they must anticipate the likely response of a rival to any given change in their price, or their non-price activity. Strategy is extremely important to firms that are interdependent. In the case of petrol retailing, a seller like Texaco may wish increase its market share by reducing price, but it must take into account the possibility that close rivals, such as Shell and BP, who may also reduce their price in retaliation.Īn understanding of game theory and the Prisoner’s Dilemma helps appreciate the concept of interdependence. A firm operating in a market with just a few competitors must take the potential reaction of its closest rivals into account when making its own decisions. The main characteristics of firms operating in a market with few close rivals include:įirms operating under conditions of oligopoly are said to be interdependent, which means they cannot act independently of each other. Mergers between oligopolists increase concentration and ‘monopoly power’ and are likely to be the subject of regulation. If the index is below 1000, the market is not considered concentrated, while an index above 2000 indicates a highly concentrated market or industry – the higher the figure the greater the concentration. For example, if three firms exist in the market the formula is X 2 + Y 2 + Z 2 where X, Y and Z are the percentages of the three firm’s market shares. The H-H index is found by adding together the squared values of the % market shares of all the firms in the market. This is an alternative method of measuring concentration and for tracking changes in the level of concentration following mergers. Source: OFCOM.įuel retailing in the UK is dominated by six major suppliers, including Tesco, BP, Shell, Esso, Morrisons and Sainsbury.įurther examples Cinema attendances Banking The Herfindahl – Hirschman Index (H-H Index) ![]() ![]() In this hypothetical case, the 3-firm concentration ratio is 88.3%, that is 121/137 x 100.įixed broadband supply in the UK is dominated by four main suppliers - BT (with a market share of 32%), Virgin Media (at 20%), Sky (at 22%) and TalkTalk (at 14%), making a four-firm concentration ratio of 86% (2015). The following are the annual sales, in £m, of the six firms in a hypothetical market: When there is a high concentration ratio in an industry, economists tend to identify the industry as an oligopoly.Įxample of a hypothetical concentration ratio Oligopolies may be identified using concentration ratios, which measure the proportion of total market share controlled by a given number of firms. ![]()
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