Monopoly Theory of Oligopolies
The monopoly theory of oligopolies is an economic theory based upon the idea that, in certain market conditions, there is an advantage to the firms that possess the most market power. Specifically, in an oligopoly, a few firms control a large portion of the market share, enabling them to set prices and create a monopoly. In an oligopolistic market, firms have the ability to change prices and affect a larger portion of the market than in a perfectly competitive market. In a monopolistic market, a single firm dominates the market, controlling prices and dictating consumer demand.
The monopoly theory of oligopolies asserts that when there is a limited number of firms in the given market, each firm has the potential to realize market power by acquainting itself with the cost and pricing structure of other firms in the market. This will enable each firm to take advantage of competitors’ costs and increase its market share. For example, if firm A knows the pricing structure of firm B, it can undercut firm B’s prices and gain a larger market share. By controlling these market costs, firms can increase their profits.
In an oligopolistic market, firms typically operate under a profit maximization model. The profit maximization model requires each firm to operate at its maximum output in order to make the most profit. This could mean that competition drives prices down and the quality of goods decreases, which could lead to fewer sales. This can undermine the economy and hurt consumers.
In addition, in an oligopolistic market, firms must maintain a certain amount of interdependence to be able to survive. This is because, if one firm increases its prices or decreases quality of goods, its rivals can do the same or find a way to undercut pricing so as to maintain market share. This leads to a situation where firms must carefully adjust prices and production levels to maintain the delicate balance between competition and profit that is necessary for their long-term survival.
The presence of a few strong firms in a market, as opposed to many weaker firms or one large firm, can lead to a situation wherein firms can collude, thus creating a cartel. Cartels generally exist to maximize profits through reducing competition and setting prices artificially high. This can be seen in the global oil industry, wherein the OPEC cartel maintains control of the industry by setting prices and restricting production.
In conclusion, the monopoly theory of oligopolies is an economic theory that centers around the idea that, by working together, a few firms can maintain the power they need to dominate a market and control prices. This can lead to higher profits at the expense of the consumer, putting their economic well-being at risk. In addition, the presence of a few strong firms can lead to collusion and the formation of a cartel, thereby further restricting competition and artificially increasing prices.
