If the oligopolist reduces its price below P, it is assumed that its competitors will follow suit and reduce their prices as well. The assumption that every element producers and buyers has perfect knowledge of the entire market does not hold true in case of oligopoly. Firms differ considerably in size. The net result will be price -finite or price-rigidity in the oligopolistic condition. Presence of Sony in the industry has placed barriers to other small firms through ownership and patents.
If a small number of sizeable firms constitute an industry and one of these firms starts advertising campaign on a big scale or designs a new model of the product which immediately captures the market, it will surely provoke countermoves on the part of rival firms in the industry. See: Collusion and game theory Game theory is looking at the decisions of firms based on the uncertainty of how other firms will react. But such expenditure is the life-blood of an oligopolistic firm. This gives them a certain degree of market power which allows them to charge higher prices within a certain range. The group of oligopoly is better off cooperating and acting like the monopoly.
Under oligopoly with product differentiation each firm controls a large part of the market by producing differentiated product. Another approach is to for firms to follow a recognized ; when the leader raises prices, the others will follow. In both cases, they compete on price against each other. For example, if a company raises its prices, its competitors will do the same, forcing customers to pay more. Summary The analysis of market structures is of great importance when studying microeconomics. A rival seller may ignore the actions of the competitors.
Thus, every seller keeps an eye over its rival and be ready with the counterattack. An oligopolistic industry may benefit both customers and brands, but it still has its drawbacks. If the firms produce a homogeneous product, like cement or steel, the industry is called a pure or perfect oligopoly. Thus, every firm must keep a close eye on its counterpart and plan the promotional activities accordingly. It leads to a sort of monopoly within oligopoly.
Yet, if a cartel can price fix if they operate beyond the reach of governments — is one example. In today's competitive era, new brands are emerging every day. Hence under oligopoly no firm resorts to price-cut without making price-output decision with other rival firms. That gives Monsanto an extremely high level of market power. If one decides to launch a sales campaign, it must take into account the possibility that its close competitors will act in a similar manner, which would possibly trigger a price war.
Collusion and game theory is more complex if we add in the possibility of firms being fined by a government regulator. Unfortunately, it is not clearly defined what a «few» firms means exactly. This is an important aspect, because it is the only market structure that can theoretically result in a socially optimal level of output. Such type of Oligopoly is found in the producers of consumer goods such as automobiles, soaps, detergents, television, refrigerators, etc. All other software providers make programs that are compatible with these systems, further reinforcing the dominance of the major players.
Besides the competitors quickly follow the price reduction by an oligopolist, he will gain only very little sales. Nature of the Product: The firms under oligopoly may produce homogeneous or differentiated product. Collusive Oligopoly: If the firms cooperate with each other in determining price or output or both, it is called collusive oligopoly or cooperative oligopoly. A firm under oligopoly relies more on non-price competition. Price wars tend to lead to lower profits, leaving a little change to market shares.
This is evidenced by Sony sales totaling to 8. New entry firms lack this ability and are therefore disadvantaged as compared to Sony; an ogopolistic firm in the industry. It is the best known model explaining relatively more satisfactorily the behavior of oligopolistic firms. Hence there is always the fear of retaliation by rivals. There exists severe competition among different firms and each firm try to manipulate both prices and volume of production to outsmart each other.