The market is referred to as a differentiated oligopoly. Types of market structures: perfect competition, monopolistic competition, oligopoly and monopoly. What is oligopoly

Oligopoly market It is a form of market organization in which several large firms operate on the market, producing a homogeneous or differentiating product, and independently setting the price for the products, taking into account the possible reaction of competitors. An oligopoly exists only when the number of firms is so small that each of them, when forming its pricing policy, must take into account the reaction of competitors.

The oligopoly market is a typical form of organization of the modern market. An example of an oligopoly market with a homogeneous product is the potash fertilizer market. The car market is a typical oligopoly market with a differentiated product.

The oligopoly market is characterized by the following features :

1. several large firms operate;

2. the share of each firm in the market is significant;

3. each firm independently sets the price, taking into account the possible reaction of competitors;

4. there are barriers to entry of new firms (natural and artificial);

5. non-price competition prevails, which happens

subject (between the same goods with different quality characteristics: cars),

specific (between different goods that satisfy the same need: juices, mineral water, etc.)

functional (between goods that satisfy different needs: food production and clothing production).

Oligopoly market arises for the following reasons:

1. validity of patents for scientific discoveries and inventions;

2. control over rare resources;

3. the effect of economies of scale of production;

4. privileges from the state;

5. price and non-price competition, the use of non-economic methods of competition.

The oligopoly market is characterized by a wide variety of forms of organization. The economic literature describes various approaches to the classification of the oligopoly market. Exists oligopoly market classification on:

1) Have. Fellner which highlights:

Market in the context of maximizing industry profits;

Market in conditions of fundamental antagonism.

2) F. Machlupu which highlights:

The market is fully coordinated;

A market partially coordinated with:

a) leading firm

b) voluntary cooperation;

A market without coordination of actions, which can be represented as:

a) price war;

b) pursuing an aggressive trade policy;

c) chain oligopoly.

3)by the degree of antagonism

The market is at war;

The market is in a truce;

The market is at peace.

Thus, there may be several possible situations in the market:

a) price wars between firms;

b) price stability under non-price competition;

c) agreements on prices and production volumes, official or tacit;

d) predictable behavior of firms.

7.6.2. The oligopoly market in the absence of collusion

If firms are price competition, then the oligopoly market is analogous to the perfect competition market and is described by appropriate models. This situation is quite rare, since large firms can conduct price competition for a long time due to their large financial capabilities, which can lead to large financial losses.

One of the first models of the oligopoly market is the duopoly market model, that is, the market in which two firms operate. It was proposed in the 40s of the nineteenth century. O. Kurno .He suggested , that there are two firms of the same size. These firms are subject to a constant economies of scale, that is, when the volume of production changes, the average costs, and therefore the price, does not change. Each company decides on the volume of production independently, focusing on the free market share. As we already know, the firm achieves the maximum sales revenue provided that the price elasticity of demand is equal to one. This state is achieved if the firm produces a volume of products that can satisfy half of the market needs. Therefore, if there is one firm on the market, then it will produce products in the amount of 50% of the market capacity, since in this case the maximum revenue is provided (Fig. 711.a). If a second company enters this market, then it will focus on the market share not occupied by the first company and will produce 50% of this share, i.e. 25% of the market volume (Figure 7.11.b).

a) one firm on the market b) appearance of a second firm c) reaction of the first firm d) final equilibrium

Rice. 7.11 Market of Cournot duopoly

This situation cannot persist for a long time, since the first firm is not in an optimal position. She will decide to reduce the volume of production, focusing on the market share free from the second company (75%), and the company will set the volume of production corresponding to 50% of the free share, that is, 37.5% of the total market demand (Figure 7.11.c) ... The reduction in the volume of production of the first company creates conditions for the expansion of the production of the second company. This adjustment process will continue until each firm produces 33.3% of the total market (Figure 7.11.d). This situation will characterize the establishment of a stable equilibrium in the market, since it guarantees each firm maximum revenue.

In the 30s of the twentieth century. German economist G. von Stackelberg considered the duopoly market, in which one firm is larger than the other (asymmetric duopoly).

He came to the conclusion that equilibrium can be established, since in this case a large firm, being a leader, tries to achieve a position of independence and sets a price independently, while another, smaller firm, being an outsider, simultaneously tries to achieve a position of dependence, to adapt to conditions of sale in such a market. A smaller firm is, in fact, a price-taking firm; it acts similarly to a firm that is a perfect competitor. The adjustment process can be illustrated through the response curves (Figure 7.12). In this case, the dominant firm chooses the most advantageous point on the response curve, and the subordinate firm displays a Cournot-type response curve. G. von Stackelberg concluded that an asymmetric duopoly is an unstable form of market organization.

Figure 7.12 Market of Stackelberg duopoly

As already noted, the oligopoly market is characterized by the absence of price competition and the stability of the price level. This situation is reflected in broken demand curve models (Figure 7.13).

Figure 7.13 Demand polyline model

In accordance with this model, if an equilibrium price has formed in the oligopoly market, then firms are not interested in changing this price, since in any case they incur losses in the long run.

If one firm decides to increase the price, other firms are more likely to leave the price unchanged. As a result, the firm that raised the price will lose a large number of buyers, since the demand will be elastic, and, consequently, the firm will reduce revenues and profits. If a firm lowers the price of its products, then other firms are likely to lower the price as well. As a result, the expansion of sales will be insignificant (demand will be price inelastic), will not compensate for the losses associated with a decrease in prices, and, therefore, the firm's revenues and profits will decrease. Thus, any deviation of the price from equilibrium leads to a reduction in the firm's revenue and profit.

This theory also explains why firms in the oligopoly market keep prices constant even if production costs change.

In the 60s. American economists Efroimson and P. Suisi developed a model of a broken demand curve, which explains the upward trend in the price level during the period of economic growth (Fig. 7.14).

Figure 7.14 Model of a broken demand curve in conditions of economic growth

During the period of economic growth, the volume of production and income of the population grows. Therefore, the company raises the price, hoping that the growth of incomes of the population will allow selling products at higher prices. The decline in sales will be insignificant (inelastic demand) as buyers' incomes have increased and they can afford to buy the item at a higher price. Due to this, the company will increase its revenue from the sale of products. If one firm lowers the price of its products, then other firms are likely to leave the price unchanged, expecting that with increased income, there will always be buyers willing to pay the same price for the offered product. As a result, the firm that lowers the price will have a significant increase in product sales and income. Comparing the two options, the company's management comes to the conclusion that it is more profitable to raise prices, since no additional efforts are required to expand production.

In the oligopoly market, there are a large number of different options for the behavior of firms and this leads to the use of simulation mathematical models that allow describing the behavior of competitors in the market and choosing the optimal line of behavior. In particular used game theory - a section of applied mathematics, with the help of which the optimal strategy of the subject's behavior in conflict situations is established, which is understood as a situation of collision of interests of two or more parties pursuing different goals. Each of the parties to the conflict can have some influence on the course of events, but does not have the ability to completely control it.

The mathematical model should describe:

Many stakeholders;

Possible actions for each side;

Interests of the parties, represented by the payoff functions for each player.

In game theory, it is assumed that the payoff functions and the set of strategies available to each player are generally known.

Games are classified based on one principle or another.

By the way of interaction they can be cooperative if firms cooperate in decision making, or non-cooperative if firms compete with each other.

By type of win games are zero-sum, when the gain of one player is equal to the loss of another, and with a constant difference, when all players simultaneously win or lose.

Solving the model provides managers with a decision matrix that reflects the payoffs for all possible strategies and situations. Based on the matrix, they must make a decision. The choice of solution depends on the nature of the manager. There are solutions for:

The criterion for maximax (optimism), i.e. the manager focuses on the maximum payoff;

The criterion for maximin (pessimism), i.e. the manager seeks to choose a strategy of behavior that minimizes losses;

Indifference criterion (they are guided by the maximum average result for the best strategy).

Most often, the pessimistic option is chosen, since it is assumed that the opponent is a qualified specialist who chooses the best solutions.

Suppose we have two firms ( A and V) having the same volume of sales in the market and two strategies of the firm's behavior are possible A: raise the price of the product or keep the price unchanged (Table 7.1).

Since a competitor will retaliate, one of four situations may arise in the market:

1) firm A increases the price, the firm V leaves the price unchanged;

2) firm A V increases the price;

3) firm A increases the price, the firm V increases the price;

4) firm A leaves the price unchanged, the firm V leaves the price unchanged.

Suppose that the losses in the event of a price increase by the firm A in our case will amount to $ 10,000, since some of the buyers will start buying goods from the company V, which does not raise the price. If the firm V will also increase the price, then the losses of each firm will amount to $ 5,000. The economic results of each situation for firms are presented in the form of a table.

Table 7.1

Decision matrix

				Minimum losses of firm B for each strategy
		The price is rising	Price does not change	Minimum losses of firm B for each strategy
		Firm A suffers losses in the amount of $ 5,000. Firm B incurs losses in the amount of $ 5,000.	And he bears losses in the amount of $ 10,000. B receives a profit of $ 10,000.
	Price does not change	Firm A makes a profit of $ 10,000. Firm B incurs losses in the amount of $ 10,000.	Firm A's income does not change Firm B's earnings remain unchanged
Minimum losses of firm A for each strategy

Firm solution A will depend on the chosen strategy. One of these strategies is the strategy of minimizing losses. In this case, the firm's management estimates possible losses for each strategy and chooses the strategy that brings the least losses. In our case, the company's management A will raise the price, assuming that the firm V will also raise the price.

If firms coordinated their actions (cooperative play), then prices in the market would remain unchanged. Research has shown that if the payoffs of the players are asymmetric, then there are inevitably elements of cooperation in the choice of strategies.

The oligopoly market, as we have already noted, is characterized by a wide variety of behavior models, which, in the final analysis, are focused on maximizing profits. In modern economic literature, works appear that argue that large firms set as the goal of their behavior not maximizing profits, but achieving other results: increasing sales, maintaining market share, conquering new markets, and so on. All this complicates the analysis of the oligopoly market and expands the scope of application of simulation in the practice of making managerial decisions.

From this article you will learn:

Monopoly, hindering competition, suppressing it, acts in the opposite direction. To avoid the negative consequences of monopoly, he interferes in market processes using antitrust regulation.

It includes:

1) administrative control over monopolized markets;
2) organizational mechanism;
3) antitrust legislation.

Antimonopoly control of monopolized markets combines methods of influencing monopolized production. This includes financial penalties for violations of antitrust laws. There are cases when a company, caught in the systematic use of methods of unfair competition and lost in a lawsuit, is directly disbanded.

The organizational mechanism of antimonopoly regulation aims to resist the monopoly by preventive methods. Without touching upon monopoly as a form of production, the methods and methods of such state policy are aimed at making monopoly behavior unprofitable for big business. Among such methods, one can single out the regulation of customs duties, the abolition of quantitative quotas, support for small businesses, simplification of the licensing procedure, optimization of production, whose products can compete with the goods of monopolies, etc.

The most effective and developed form of state regulation of monopoly power is antimonopoly legislation.

Antimonopoly legislation is normative acts that determine the organizational and legal basis for the development of competition, measures to prevent, restrict and suppress monopolistic activities and unfair competition. Such legislation in the United States is called antitrust legislation. In this regard, the most famous are the laws of Sherman (1890), Clayton (1914), the Seller-Kefauver law (1950).

Antitrust laws outlaw price discrimination against buyers when such discrimination is not justified by a difference in cost. Antitrust laws prohibit the acquisition of shares in competing corporations if doing so would weaken competition. The laws prohibit conspiracies with the aim of limiting production or trade; attempts to monopolize any part of production or trade are declared criminal.

To protect the rights of consumers from monopolistic activities and the development of competition, the legislation prohibits: restricting or stopping the production of goods, as well as the production and supply of raw materials, materials, components without prior agreement with the main consumers; reduce the supply or delay the sale of goods in order to create, maintain or increase shortages and increase prices. It is forbidden to compel the consumer to include in the subject of the contract unnecessary goods, to impose other preliminary discriminatory conditions, it is forbidden to stop or delay the supply of goods or the performance of services in response to the buyer's claims to the quality of the goods.

The antimonopoly legislation establishes forms of warning, liability and compensation in case of committing prohibited actions.

In order to restrict monopolistic activities and encourage competition in countries with market economies, state antimonopoly bodies are created. In the United States, antitrust regulation is carried out by the Department of Justice's Antitrust Office and the Federal Trade Company, in Japan by the Fair Deals Commission, and in France by the Competition Council. In 1992, the Republic of Belarus adopted a law on counteracting monopolistic activities and developing competition.

Antimonopoly activities are direct support for entrepreneurship and the development of market competition in the economy.

Oligopoly competition

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1. The product of each firm trading on the market is an imperfect substitute for the product sold by other firms.
2. There are a relatively large number of sellers in the market, each of whom satisfies a small, but not microscopic, share of the market demand for a generic type of product sold by the firm and its competitors.
3. Sellers in the market do not take into account the reaction of their rivals when choosing which price to set for their goods or when choosing benchmarks for the volume of annual sales.
4. The market has conditions for free entry and exit

Although, in a market with monopolistic competition, each seller's product is unique, enough similarities can be found between different types of products to group sellers into broad categories similar to the industry.

A product group is a collection of several closely related but not identical products that satisfy the same customer need. Within each product group, sellers can be viewed as competing firms within the industry. Although there are problems with defining the boundaries of industries, i.e. when defining an industry, a number of assumptions must be made and a number of appropriate decisions must be made. However, when describing an industry, it can be useful to cross-estimate the products of rival firms, since in an industry with monopolistic competition, the cross-demand for the goods of rival firms must be positive and relatively large, which means that the goods of competing firms are very good substitutes for each other, which means that if the firm raises the price above the competitive price, then it can expect a significant loss sales in favor of competitors.

Typically, in the markets with the most monopolistic competition, the four largest firms account for 25% of total domestic supply and the eight largest firms for less than 50%.

An oligopoly is a market structure in which very few sellers dominate in the sale of a product, and the emergence of new sellers is difficult or impossible. The goods sold by oligopolistic firms can be both differentiated and standardized.

Typically, oligopolistic markets are dominated by two to ten firms, accounting for half or more of total product sales.

In oligopolistic markets, at least some firms can influence the price due to their large shares in the total number of goods produced. Sellers in an oligopolistic market know that when they or their rivals change prices or their sales, the consequences will affect the profits of all firms in the market. Sellers recognize their interdependence. Each firm in the industry is expected to acknowledge that a change in its price or output will trigger a reaction from other firms. The response that any seller expects from competing firms in response to changes in their price, output, or marketing activities is the primary determinant of their decisions. The reaction that individual sellers expect from their rivals affects the equilibrium in oligopolistic markets.

In many cases, oligopolies are protected by barriers to market entry similar to those for monopoly firms. A natural oligopoly exists when several firms can supply products to an entire market at lower long-run costs than many firms would.

1. Only a few firms supply the entire market. The product can be either differentiated or standardized.
2. At least some firms in the oligopolistic industry have large market shares. Consequently, some firms in the market are able to influence the price of a product by varying its availability on the market.
3. Firms in the industry recognize their interdependence.

There is no single model of oligopoly, although a number of models have been developed.

In oligopolistic markets, individual firms consider the possible reactions of their competitors before advertising and undertaking other marketing costs. An oligopolistic firm can significantly increase its market share through advertising only if rival firms do not retaliate by launching their own advertising campaigns.

In order to better understand the challenges faced by the oligopolistic firm when choosing a marketing strategy, it is useful to approach it from a game theory perspective. Those. firms must develop a maximin strategy for themselves, and decide whether it is profitable for them to start advertising campaigns or not. If firms do not start advertising campaigns, then their profits do not change. However, if both firms seek to avoid the worst outcome by pursuing a maximin strategy, then they both prefer to advertise their product. Both are chasing profits and both end up with losses. This is because everyone chooses the strategy with the least losses. If they agreed not to advertise, then they would have made big profits.

There is also evidence that advertising in oligopolistic markets is done on a larger scale than is necessary to maximize profits. Often, advertising of competing firms only leads to higher costs, without increasing sales of products, because rival firms are wiping out each other's ad campaigns.

Other studies have shown that advertising increases profits. They point out that the higher the proportion of advertising spend to industry sales, the higher the industry's profit margin. And since higher rates of return indicate monopoly power, this implies that advertising leads to greater price control. It is unclear, however, whether higher ad spend translates into higher margins or higher margins cause higher ad spend.

Other models of oligopoly

Other models of oligopoly have been developed to try to explain certain types of business behavior. The first tries to explain the invariability of prices, the second - why firms often follow the pricing policy of the firm, which acts as a leader in the announcement of price changes, the third shows how firms can set prices so as not to maximize current profits, but to maximize profits in the long run. by preventing new sellers from entering the market.

Oligopoly terms

Another market model is an oligopoly, which differs significantly from those discussed above. Its first and main feature is the availability of a limited number of manufacturers on the market. Typically, these companies produce a similar but not the same product, have a large production volume, and each control a significant market share. Examples of oligopoly are producers of non-ferrous metals (especially aluminum), steel, automobiles, tobacco products, certain types of alcoholic beverages, etc.

Let's take the automotive industry as an example. This industry is very convenient for demonstrating the oligopoly model. There are three main manufacturers in the US auto industry (for simplicity, imports can be ignored, since their role is only to expand the market model, not to change its conditions). It will be about the companies "General Motors", "Ford" and "Chrysler".

They manufacture vehicles of various types and purposes, i.e. similar products that, from an economic point of view, have the same usefulness to the consumer. In an oligopoly - with a limited number of producers - one of them has a significant impact on the others.

Due to the scale of the aforementioned car companies and the similarity of the product produced, the actions that any of them can take in the market will have completely different consequences than in other market models. As a result, the entire market can be distorted.

Suppose Ford Motors decides to cut prices to gain additional market share. Of course, the standard demand curve shows that if you lower the price of a product, you can expect an increase in market share.

In fig. it is shown that the upper part of the broken line of demand declines to the right to the point at which Ford decides to lower the price (the curve breaks and continues to decline from a lower level to a certain point determined by the market).

The two parts of the broken line are connected by a dotted line. This is due to the retaliatory actions of two other companies, which are also cutting prices. But if they do, then the rest of the companies must do the same. As a result, all companies lose profits because they must lower prices, and none of them will achieve additional market share in the capture. What should the oligopolists do in this case?

It seems logical for the three car manufacturers to get together for a business meeting and agree on price levels, production volumes and other marketing aspects of their activities. However, in the United States, such meetings are prohibited by law, which qualifies them as collusion. There are three types of collusion. The first is explicit (public), as in the above example. Manufacturers openly meet to discuss the price level, as everyone knows.

In some countries this is considered illegal, however, in others, as well as in some industries, it is even encouraged. In each country, the position of the law on this issue is different. Another type of collusion is secret: producers hold a secret meeting, hidden from the public eye, and the decisions taken are usually not disclosed to the public or the authorities. Collusion is illegal in the United States and several other countries.

There is a third type of collusion - implicit collusion: each company understands what is good for it and for the industry as a whole and tries to follow some unspoken set of rules without discussing its actions with competitors. Consequently, in these conditions, Ford Motors will never decide to cut prices, realizing that this will lead to a loss of profits across the entire automotive industry. This type of collusion is not illegal mainly because the fact of its existence cannot be proven. Indeed, if someone, out of his own interests, acts in the market according to all known rules, then this will not contradict the laws.

The marketing manager's understanding of the fact that it is necessary to compete with other companies not on a price basis, but on a different basis, is a marketing imperative in a market oligopoly. As a consequence of this understanding, in the automotive industry, fierce competition is developing between manufacturers in the areas of safety, fuel economy of automobile engines, style and luxury of interior decoration and the application of advanced technologies, which are more productive and beneficial for society as a whole.

So, since oligopolists are well aware of what is beneficial to them, they act in concert, and usually the result is the same as in a monopoly. However, in each country there are special bodies that monitor the activities of oligopolists, who can actually set their own monopoly conditions on the market. The main complaints against the oligopoly boil down to the fact that they are so strong that they have an impact on the international market.

Indeed, large oligopolistic companies often meet in the world market and collaborate with other companies and countries in production. This is typical of the automotive industry. For example, the automobile giants of Japan, Germany and the United States have cooperated for some time in the production of automobiles.

Monopoly oligopoly

Monopoly competition occurs when many sellers compete to sell a differentiated product in a market where new sellers are likely to emerge.

A market with monopolistic competition is characterized by the following:

1. The product of each firm that trades on the market is an imperfect substitute for the product sold by other firms.

Each seller's product has exceptional qualities and characteristics that lead some buyers to prefer their product to a competing firm. Product differentiation means that the item sold on the market is not standardized. This may be due to actual quality differences between products, or due to perceived differences that result from differences in advertising, brand prestige, or "image" associated with the possession of the item.

2. There are a relatively large number of sellers in the market, each of whom satisfies a small, but not microscopic, share of the market demand for a general type of product sold by the firm and its competitors.

In monopolistic competition, the size of the market shares of firms generally exceeds 1%, i.e. That is, the percentage that would exist in perfect competition. Typically, a firm accounts for 1% to 10% of market sales over the course of a year. 3. Sellers in the market do not take into account the reactions of their rivals when choosing which price to set for their goods or when choosing benchmarks for the volume of annual sales.

This feature is a consequence of the still relatively large number of sellers in a market with monopolistic competition. Those. if an individual seller cuts the price, then it is likely that the increase in sales will come not from one firm, but from many. As a consequence, it is unlikely that any individual competitor will suffer a significant enough loss in market share due to a decrease in the selling price of any particular firm. Consequently, there is no reason for competitors to react to this by changing their policies, since the decision of one of the firms does not significantly affect their ability to generate profits. The firm knows this and therefore does not consider any possible competitor reactions when it chooses its price or sales target.

4. The market has conditions for free entry and exit. With monopolistic competition, it is easy to set up a firm or leave the market. Favorable market conditions with monopolistic competition will attract new sellers. However, market entry is not as easy as it was in perfect competition, as new sellers often struggle with their new brands and services. Consequently, existing firms with an established reputation can maintain their advantage over new manufacturers. Monopoly competition is like a monopoly situation in that individual firms have the ability to control the price of their goods. It also looks like perfect competition because each product is sold by many firms, and there is free entry and exit in the market.

The existence of an industry with monopolistic competition

While each seller's product is unique in a market with monopolistic competition, enough similarities can be found between different types of products to group sellers into broad, industry-like categories.

However, when describing an industry, it can be useful to estimate the cross-elasticity of demand for the goods of rival firms, since in an industry with monopolistic competition, the cross-elasticity of demand for the goods of rival firms must be positive and relatively large, which means that the goods of competing firms are very good substitutes for each other, which means that if the firm raises the price higher than the competitive one, then it can expect a loss significant sales in favor of competitors.

Typically, in the markets with the most monopolistic competition, the four largest firms account for 25% of total domestic supply and the eight largest firms for less than 50%.

Typically, oligopolistic markets are dominated by two to ten firms, accounting for half or more of total product sales.

The following features of oligopolistic markets can be distinguished:

1. Only a few firms supply the entire market. The product can be either differentiated or standardized.

2. At least some firms in the oligopolistic industry have large market shares. Consequently, some firms in the market are able to influence the price of a product by varying its availability on the market.

3. Firms in the industry recognize their interdependence.

There is no single model of oligopoly, although a number of models have been developed.

Oligopoly models

The collusion-based oligopoly model. In an oligopolistic market, each firm has a choice between cooperative () and noncooperative (noncooperative) behavior. In the first case, firms are not bound in their behavior by any explicit or secret agreements with each other. It is this strategy that engenders price wars. Firms come to cooperative behavior if they intend to reduce mutual competition. If, under conditions of an oligopoly, firms actively and closely cooperate with each other, this means that they are conspiring. This concept is used in cases where two or more firms have jointly set fixed prices or volumes of output and divided the market or decided to do business together.

Collusion is a generic term for a cartel or trust.

A cartel is a group of firms that work together to agree on output and price decisions as if they were a single monopoly.

Cartels are illegal in the United States. However, firms often succumb to the temptation to collude to insulate themselves from competition without resorting to open agreement. collusion, if successful, can be overwhelming.

The most famous international cartel is the OPEC cartel of the Organization of the Petroleum Exporting Countries, formed in 1960. In 1973, it first used its power to impose an oil embargo. Then the price of a barrel of crude oil tripled. During the 70s. OPEC successfully controlled crude oil exports. But by the mid-80s. there was a surplus of oil and the price plummeted to less than $ 10 a barrel instead of $ 30 in 1979.

Price Leadership Model

In oligopolistic markets, one firm acts as a price leader who sets a price to maximize its profits, while other firms follow the leader. Rival firms charge the same price as set by the leader.

The leading firm assumes that other firms in an oligopolistic market will not react in a way that changes the price it has set. The price leadership model is called partial monopoly because the leader sets a monopoly price based on his marginal income and marginal cost. Other firms take this price as given, they follow the leader's prices, assuming that the larger firms have more information about market demand.

Price leadership has a conspiracy nature, since open pricing agreements are prohibited by antitrust laws. Price leadership has an advantage over cartels in that it retains the freedom of firms to produce and sell, whereas in cartels they are governed by quotas and / or market delimitation.

There are two main types of price leadership:

A) the leadership of the company with significantly lower costs than in the competitive environment;
b) the leadership of a company that occupies a dominant position in the market, but does not significantly differ from its followers in terms of the level of costs.

Allocate the market model of a dominant firm with a competitive environment and closed entry and with free entry.

Cournot duopoly model

The duopoly model was first proposed by the French mathematician, economist and philosopher Antoine-Augustin Cournot in 1838.

A duopoly is a market structure in which two sellers, protected from additional sellers, are the only producers of a standardized product with no close substitutes. Duopoly economic models are useful for showing how an individual seller's assumption about a competitor's response affects equilibrium output.

The Cournot duopoly model assumes that each of the two sellers assumes that his competitor will always keep his output constant at the current level. The Cournot model assumes that salespeople do not know about their mistakes.

There are various modifications of the duopoly model: Chamberlin's model, Stackelberg's model, Bertrand's model, Edgeworth's model.

The specifics of the behavior of oligopolists in the market

The interdependence of oligopolistic firms in the market predetermines the specifics of the behavior of oligopolies in the market. Unlike other market structures, an oligopolistic enterprise must always take into account that the prices and output it chooses directly depend on the market strategy (behavior) of its competitors, which (behavior), in turn, is determined by the decision it has chosen.

Because of this, the oligopolist:

Cannot regard the demand curve for its products as given;
does not have a given marginal income curve (as well as demand, MR changes depending on the behavior of the firm itself and its competitors);
does not have a clear point of equilibrium (similar to how it exists under perfect competition or under pure monopoly);
cannot use the equality MR = MC to find the optimum point.

Models of cooperative and non-cooperative oligopoly

The variety of forms of behavior of oligopolies and the peculiarities of their relationships in specific market situations predetermine the existence of a large number of various models of oligopoly. Taken as a whole, these models can provide a reliable portrayal of the oligopoly market.

It is conventionally accepted to divide oligopoly markets into two types, depending on how its participants interact with each other: cooperative oligopoly and uncooperative oligopoly.

In a cooperative oligopoly, firms agree on mutual behavior by colluding or otherwise coordinating their actions.

In an uncooperative oligopoly, firms, seeking to maximize profits, act independently, at their own peril and risk. In accordance with this division, oligopoly models are also classified.

As an example of models of uncooperative oligopoly, the following will be considered: Cournot model, Stackelberg model, and a broken demand curve model. Examples of the cooperative oligopoly model are: cartel model and price leadership models (leadership of the dominant firm in terms of price and barometric price leadership). The game theory model will be considered in a separate section and will reveal the mechanism of the strategic choice of firms between cooperative and uncooperative oligopolies.

Examples of oligopoly

The example of electrical engineering - one of the most important branches of modern industry - shows the economic consequences of the dominance of cartels.

As you know, electrical engineering arose at the beginning of this century immediately as a branch of mass production. A few large manufacturers tried to negotiate a division of the world market even before the First World War. However, the golden age of cartels did not begin until the interwar period.

On Christmas Eve 1924, the Phoebus electric lamp cartel, named after the sun god, was created in Geneva. Its participants were Osram (Germany), Philips (Holland), General Electric (Great Britain) and others. In addition, both leading American manufacturers, General Electric and Westinghouse, were also behind the scenes.

The whole world was divided into three areas:

A) the national territories of each of the participants;
b) overseas colonies of Great Britain;
c) common areas.

The markets of the national territories were reserved for local producers. This seemingly innocent condition actually meant the establishment of a monopoly there, which directly caused a sharp rise in prices. For example, a 60-watt lamp cost 15 cents in the United States, where there was competition with non-Phoebus firms. In Sweden, in the presence of weaker competitors (cooperatives), the cartel achieved a price of 33 cents. And in Germany and Holland, where there were almost no rivals, the consumer paid 48 and 70 cents. The maximum gap between monopoly and competitive prices was almost fivefold.

Even in neutral territories, where lamps from different companies were sold, and there was a semblance of competition, the total volume of production was set as definitely as if the market was controlled by a single monopoly firm.

The fruits of monopolization were not slow to show themselves: the cartel began to resort to such unprecedented methods of increasing profits, which no firm in a highly competitive industry would ever dare to do. Thus, the members of the cartel were recommended to limit the life of a light bulb to 1,000 hours, although there was already a technology that made it possible to bring it to 3,000 hours. The calculation was simple: the faster the lamps burn out, the more new ones need to be bought to replace them. The main coordinator of the cartel's actions, J. M. Woodward, informed them that limiting the life of the lamps would allow them to double their sales in 5 years.

Another, incidentally preserved and now, innovation of the Phoebus cartel was the standard it adopted, according to which lamps are marked in watts, not in lumens. Thus, when a lamp is sold, the consumer is informed of the secondary characteristic of the product (how much the lamp consumes energy) and the main one is hidden (how much light it gives).

The Phoebus cartel did not survive the 1941-1949 judicial investigation by the US antitrust authorities.

Scandalous disclosures of collusion are periodically repeated not only in electrical engineering, but also in other industries up to the present time. There is no doubt that cartels have retained their appeal to oligopolists.

Market structure oligopoly

There are very few markets in the world with a significant number of manufacturers producing homogeneous products, which is characteristic of perfect competition. It is very rare to find industries in which a single firm (monopolist) produces a certain product with unique properties. Perfect competition and monopoly are two polar types of market structures.

Markets that are neither monopoly nor perfectly competitive are considered by the theory of monopolistic competition and various theories of oligopoly. These theories explain the emergence of incentives for firms to differentiate their products, as well as the emergence of prerequisites for joint action in setting prices.

Monopoly competition is a market structure with elements of both perfect competition and monopoly.

Monopolistic competition is characterized mainly by the following features:

First, product differentiation. Each firm produces products that are different from those of other firms. This differentiation can be real or perceived;
second, the possession of a certain share of monopoly power obtained by the manufacturer as a result of product differentiation. Hence the incentive for differentiation;
thirdly, the stability of the clientele. If the price of a product rises, the firm does not lose all of its customers. The demand curve for the product of a monopolistically competitive firm slopes from top to bottom to right. However, the existence of many firms selling similar products makes the demand curve elastic;
fourthly, ignoring rivals, independently acting in the market;
fifth, the absence of serious barriers to entry into the industry.

A monopolistically competitive firm is largely monopolistic. The firm produces such a quantity of goods at which the equality of marginal income and marginal costs (MR - MC) is observed.

In the short term, the following rules apply:

If the price exceeds the total average cost, the firm makes a profit;
- if the price is less than the total average costs, - the firm continues to operate, as it has the ability to pay;
- if the price is less than variable costs - the firm stops production.

In the long run, a monopolistically competitive firm earns only normal profits. If a firm suffers losses, it leaves the industry. This means that the remaining firms have more customers. The demand curve for each remaining firm shifts to the right. If a firm makes a profit, it attracts new firms to the industry. As a result, there are fewer buyers for every firm in the industry. The demand curve shifts to the left.

In the long run, the marginal income of the firm is equal to the marginal costs: MR - MC (the firm maximizes profit) AND P = & 4C (the price is equal to the long-term average cost: the firm makes a normal profit).

When assessing the impact of monopolistic competition on the economy, it is necessary to take into account a number of circumstances:

1. In this market structure, resources are not allocated efficiently because the price exceeds the marginal cost in equilibrium. Society would benefit if more goods were produced.
2. It is believed that in the conditions of monopolistic competition at the minimum point of the long-term average cost curve, production is not carried out. Firms are not taking advantage of scale-up. Fewer firms independently producing more products would create products with lower average costs. However, having more firms means that consumers have a wider choice of products and spend less effort to find a seller.
3. The specified market structure is characterized by non-price competition. A monopolistically competitive firm has an incentive to create products that differ from those of other manufacturers. Thus, it can move the demand curve to the right and increase profits in the short run. Non-price competition suggests that the attractiveness of a product to consumers is achieved not so much by lowering prices as by improving quality, creating new products, and improving service. Advertising is an important means of non-price competition.

Oligopoly is a market structure in which few firms dominate the market because existing barriers prevent new producers from entering the market.

The main ones include the following characteristics of an oligopoly:

Interdependence (since there are few firms operating in the industry, each is concerned with the behavior of rivals and, making its own decisions, tries to predict the next steps of competitors);
- availability on the markets of homogeneous products (aluminum) or differentiated products (washing machines);
- predominance of non-price competition over price competition (it is more profitable for competitors to improve the product than to change its price).

There are several models of oligopoly. Their specificity is based on the difference in the firm's reaction to the actions of competitors.

The broken demand curve model allows us to understand why oligopolistic prices are more stable than prices in other market structures. This model is based on a number of assumptions: first, firms produce differentiated products; second, the oligopolistic firm assumes that the rival will not raise prices after it, which would lead to a loss of buyers. If the price is reduced by the firm, competitors will take a similar step, and then the firm will be unable to attract additional buyers; third, the oligopolistic firm maximizes profits by producing a quantity of goods such that marginal revenue equals marginal cost. Oligopolistic prices are usually stable.

The broken demand curve model has been criticized because it does not explain how price levels and product output are determined.

Game theory describes a situation where the price decision of one firm depends on the predicted reaction of the opponent. Typically, each firm's earnings are higher when firms partner with other manufacturers in the industry.

Collusion occurs when firms in the market coordinate their activities. Coordination takes many forms. A cartel is an organization of producers who collectively determine the price level and output for each firm. The Gentlemen's Agreement is an informal agreement of firms to observe in practice the interests of oligopolistic firms.

The functioning of cartel agreements depends on several factors: the number of firms in the industry (the more firms there are, the more likely a firm will break the agreement; operating outside the cartel, a firm can lower prices by lowering prices and increase profits by selling more goods); heterogeneity of the product (the more heterogeneous the product that is sold on the market, the more difficult it is to conclude a cartel agreement); legal barriers (laws against associations complicate their creation).

When the cartel seeks to raise the rate of return, new firms are recruited into the industry. They force existing producers to provide them with a production quota or market share, or they operate outside the cartel.

Substitutes can be easily found by consumers if the cartel has been in operation for a long enough time and significantly increases prices.

Price leadership is a practice in which one firm is allowed to change prices and the other manufacturers follow the leader in pricing.

The leader can be the largest firm in the industry, the manufacturer with the lowest, the firm that is the first to respond to changes in demand or cost levels.

When assessing the impact of an oligopoly on the economy, it is necessary to proceed from the fact that this market structure has such an advantage as economies of scale of production. The negative feature of this market structure is that prices are higher and production volumes are lower compared to perfect competition.

The Schumpeter-Galbraith hypothesis suggests that oligopoly facilitates the development of production and the introduction of new technology. Because research and development is expensive, only large firms can afford to spend money when the end result of the investment is unclear.

Critics of this hypothesis believe that large firms are not flexible and creative enough to develop new products.

Oligopoly pricing

In some industries, especially where there is an oligopoly, one company can set prices for the industry as a whole. These are the companies that dominate the industry. Examples include DuPont, Kodak, Hershey, U.S. Steel, National Gypsum, and Gillette.

A price leader must take his role seriously and exercise caution when setting prices. The firm needs to have a good understanding of the industry's cost and demand parameters. Being overly aggressive in setting prices could attract unwanted attention from antitrust officials. IBM has drew criticism for what has been called “temporary price cuts to drive out a competitor,” or aggressive low-pricing tactics that have ruined competitors. But as a result of the price wars for both personal and basic computers, the company's price dominance has weakened. IBM can no longer pursue the strategies of the price leader.

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An oligopoly is a market structure in which very few (oligo) sellers dominate in the sale of a product, and the emergence of new sellers is difficult or impossible.

The product from different vendors can be both standardized (for example, aluminum) and differentiated (for example, cars).

Typically, these markets are dominated by 2 to 10 firms, accounting for 50% or more of total product sales. For example, the 8 largest US photographic equipment companies account for more than 85% of production. The Kodak company dominates this market.

Oligopolistic markets have the following characteristics:

- a small number of firms and a large number of buyers. This means that the volume of the market supply is in the hands of several large firms that sell the product to many small buyers;
- differentiated or standardized products. In theory, it is more convenient to consider a homogeneous oligopoly, but if an industry produces differentiated products and there are many substitute goods, then this set of substitutes can be analyzed as a homogeneous aggregated product.
- the presence of significant barriers to entry into the market, i.e. large barriers to entry into the market as in a pure monopoly market: scale of production, patents, licenses, etc.
- firms in the industry have and are aware (as opposed to monopolistic competition) their interdependence, therefore, price control is limited. Only firms with large shares in total sales can influence the price of a product.

The measure of market dominance of one or more large firms is determined by the concentration coefficient (the percentage of sales of the four largest firms to total industry output) and the Herfindahl-Hirschman index, which is calculated by summing the results obtained by squaring the market percentages of firms that sell products to this market:

HHI = S21 + S22 + S23 +… S2N,

Where S1 is the market share of the company providing the largest volume of supplies; S2 is the market share of the next largest supplier, etc.

Oligopoly is the predominant form of modern market structure. The reasons for its appearance and existence are largely determined by the level of development of modern production, which is based on the use of scientific and technological revolution. Their use and implementation is costly and pays off largely due to the achievement of positive economies of scale and a reduction in production costs (prime cost). On the one hand, this serves as a barrier to entry of new firms into the industry, and on the other, such costs can be recouped only through a significant share of the firm in the total volume of market sales.

The behavior of firms in oligopolistic markets is likened to the behavior of armies in war. Firms are rivals, and profit is the trophy. Their weapons are price controls, advertising, and output. That is, in an oligopoly, sellers are aware of their interdependence and must reckon with the reaction of their competitors to an increase or decrease in prices. At the same time, the reaction that the seller expects from his competitors is the main factor determining his decision about the price of the product and the volume of output. The equilibrium in the oligopolistic market and the nature of the model, which can explain the behavior of the firm in specific situations, largely depend on this reaction.

The action of competing firms is an additional constraint that firms must take into account when determining optimal prices and output. Not only cost and demand, but also competitor responses, drive decision making. Therefore, the oligopoly model should reflect all three of these points.

Thus, under conditions of oligopoly, both price and non-price competition are possible. But price-based competition methods are usually less effective, so non-price competition methods - from advertising to economic espionage - are more effective and used more frequently.

The complexity and diversity of the oligopolistic market did not allow economists to develop a single model of oligopoly, and for this reason there are several models of oligopoly.

1) The content of the first model consists of price wars, which are a cycle of successive price reductions by firms competing in the oligopolistic market. It is one of the many possible consequences of oligopolistic rivalry. Price wars are good for consumers but bad for sellers' profits. Wars continue until the price falls to the level of total average costs equal to marginal costs and sellers in equilibrium charge the same price as in perfect competition:

This equality is called Bertrand equilibrium. It assumes that firms compete by lowering prices at a constant volume of output. The decline in price occurs until it is equal to the marginal cost.

Total market output is the same as in perfect competition. Equilibrium exists when no firm can any longer benefit from falling prices, i.e. the price is equal to the average cost, and the economic profits are equal to zero. A price drop below this level will lead to losses. Moreover, each firm proceeds from the assumption that if other firms do not change their prices, then it also has no incentive to raise the price. Unfortunately for buyers, price wars are usually short-lived. Oligopolistic firms, after some time, enter into cooperation with each other in order to avoid wars and, therefore, undesirable effects on profits in the future.

2) Model of oligopoly based on collusion. As you know, in an oligopoly, each firm has a choice: between uncooperative (noncooperative) and cooperative (cooperative) behavior. In the case of non-cooperative behavior, firms are not bound in their behavior by any explicit or secret agreement with each other. It is this strategy that engenders price wars. Firms come to cooperative behavior if they intend to reduce mutual competition. If, under conditions of an oligopoly, firms actively and closely cooperate with each other, this means that they are conspiring. This concept is used in cases where two or more firms have jointly set fixed prices or volumes of output and divided the market or decided to do business together. Collusion is a generic term for a cartel or trust.

A cartel is a group of firms that work together to agree on output and price decisions as if they were a single monopoly.

In most of the developed countries of the world, cartels are prohibited by law. However, firms often succumb to the temptation to collude to insulate themselves from competition without resorting to open agreement. The benefits of collusion, if successful, can be enormous. The main problem faced by the cartel is the problem of agreeing decisions between member firms and establishing a system of restrictions (quotas) for these firms.

To form a cartel, you need the following:

- make sure that there is a barrier to entry into the industry to prevent other firms from selling products after the price rises;
- organize a meeting of all manufacturers of a given product in order to establish a joint benchmark for the overall release level;
- to establish quotas for each member of the cartel;
- to establish a procedure for carrying out the approved quotas.

Cartels impose fines on those who do not fulfill the agreement by exceeding quotas. Cartels face a challenge in making decisions about monopoly price and output level. Firms with higher average costs seek higher cartel prices. There are disagreements regarding the division of the territory.

In modern conditions, cartels exist in more flexible and rather diverse forms: patent pools, licensing agreements, consortia for the implementation of scientific research. The cartels are organized into four main categories.

Cartels are formed with the aim of:

- control of sales conditions;
- setting prices;
- separation of activities, territories, sales and consumers;
- establishing a share in a specific area of business.

There are two main types of cartels:

cartels aiming to maximize total or industry profits;

cartels that aim to allocate and fix market shares or regulate market delimitation.

3) The third model of oligopoly reflects the firm's reaction to price changes by competitors. It is called the bent (broken) demand curve model and also assumes firmness in prices. This model was proposed in 1939 by the Americans R. Hall, K. Hitch and P. Sweezy.
4) The fourth model of oligopoly is price leadership. She explains why firms often follow the firm's pricing policy as the leader in price announcements.

The lead firm assumes that other firms in the market will not react in a way that changes the price it has set. They will decide to maximize their profits at the price set by the leader. In fact, these firms are beginning to accept the price set by the leader as given.

5) The fifth cost-plus-benefit model shows that often firms set prices for their goods simply by adding to their costs the industry average rate of return. Or the oligopolist can use a formula, a technique, to determine the cost per unit of output, and a cape is added to the cost to determine the price. This pricing is particularly advantageous for firms that produce many products that would otherwise face the difficult and costly process of approximating demand and cost conditions for hundreds of different items of goods and services.
6) The sixth model is called industry-restricting pricing. It shows how firms can set prices so as not to maximize current profits, but to maximize profits in the long run by preventing new competing sellers from entering the market.

To do this, firms either conspire or follow the lead of other firms in setting prices that would prevent outsiders from entering the market. To achieve this goal, they estimate the lowest possible average cost of any new potential producer and can set the price of the product lower than the LATC minimum potential producer. This serves as a powerful barrier to entry of new firms into the industry.

7) The seventh model of oligopoly is a model based on game theory. So, when determining its own strategy, the firm estimates the likely profits and losses. Which will depend on which strategy the competitor chooses.

Suppose firms A and B control the bulk of market sales. Each of them seeks to increase sales and thereby ensure their own growth in profits. The result can be achieved by lowering prices and attracting additional buyers, activating advertising activities, etc.

However, the outcome for each firm depends on the response of the competitor. If firm A begins to cut prices and firm B follows, none of them will increase their market share and their profits will decline. However, if firm A lowers prices and firm B does not, then firm A's profits will increase. In developing its pricing strategy, firm A calculates possible responses from firm B.

If firm A decides to lower the price, and firm B follows it, the profits of firm A will be reduced by 1,000 thousand rubles. If firm A lowers the price. In firm B does not do the same, then the profits of firm A will increase by 1,500 thousand rubles. If firm A does not take any steps in the area of prices, and firm B lowers its prices, the profits of firm A will be reduced by 15,000 thousand rubles. If both firms leave prices unchanged, their profits will not change.

monopoly market competition

Oligopoly is a form of imperfect competition and in many ways resembles pure monopoly. The term "oligopoly" (gr. Oligos - a little, a little) was introduced into the scientific economic circulation by the English economist E.

Chamberlin to indicate the scarcity of market participants. An oligopoly is a market in which several firms sell standardized or differentiated goods, other firms have difficulty accessing it, price controls are limited by interdependence of firms, and there is strong price competition. Oligopsony is a market with only a few buyers. In economic theory, oligopoly is considered as the most common market structure, which is characterized by a small number of producers of the same product. Oligopoly is a market model that covers a large segment of the market - from pure monopoly to monopolistic competition.

Oligopoly is characterized by a number of features:

- in the industry there is an interdependence of firms, the strategy of market behavior of each of them is formed taking into account the actions of a few counterparties;

- the industry is dominated by several very large firms (usually two to five);

- the dominant firms are so large that the volume of production of each of them can influence the volume of industry supply. Therefore, oligopolistic firms can influence the market price, i.e. exercise monopoly power in the market;

- the product of an oligopoly can be either homogeneous (homogeneous) or differentiated;

- entry into the industry is limited by various barriers;

- the line of demand for the products of the oligopoly is similar to the line of demand for the products of the monopoly.

Oligopoly can take several forms:

- duopoly - a situation when the market is dominated by two large firms. They divide the sectoral volume of demand in a proportion corresponding to the production capabilities of each of them. Duopoly is the minimum size of an oligopoly (rigid oligopoly);

- a pure oligopoly is a market structure in which there are eight to ten firms operating in the industry with approximately equal market sales. The concepts of "big five", "big ten", etc .;

- vague oligopoly - a situation in the market in which five or six large firms share about 80% of the industry's sales volume with each other, and the rest falls on the competitive environment (outskirts). Competitive margins can be numerous, the firms included in it can be pure competitors or monopolistic competitors.

There are two main types of oligopoly:

- a homogeneous oligopoly consists of firms that produce a homogeneous, standardized product (oil, steel, cement, copper, aluminum);

- a heterogeneous oligopoly consists of firms that produce differentiated products (cars, cigarettes, household electrical appliances, etc.).

There are objective conditions for the formation of an oligopoly:

1. Economies of scale. For the industry to work effectively, it is necessary that the production capacity of each firm occupies a large share of the total market. Economies of scale are realized with a reduction in the number of producers and an increase in the market share of each. The remaining firms in the industry have better technology and economies of scale.

For example, in the US automotive market, out of 80 firms due to mergers, acquisitions and bankruptcies by the end of the twentieth century. three firms remained (General Motors, Ford, Chrysler), which account for 90% of industry sales, they are technologically more advanced and realize economies of scale.

2. The merger of several firms into one, larger one, allows to realize economies of scale and gives more power in the market, increases sales, allows you to control not only the market for the finished product, but also raw materials, i.e. there is an opportunity to reduce production costs and get more profit. This, in turn, helps create barriers to other firms and encourages more mergers. The highest degree of mergers - fusion - presupposes complete interpenetration of merging firms (railways, water power plants, automobile production).

Barriers to entry into an oligopolistic industry are: economies of scale; licenses, patents; ownership of raw materials; the amount of advertising costs, etc.

Oligopoly occupies an intermediate position between monopoly and monopolistic competition, it differs significantly from them, represents a more complex economic situation, which is due to the peculiarities of price changes. In perfect competition, the seller does not take into account the influence of other sellers and changes in consumer demand. Therefore, in a competitive market, prices change continuously depending on changes (fluctuations) in supply and demand. In a monopoly industry, the monopolist takes into account only changes in consumer demand, and determines the price and volume himself.

Under the conditions of an oligopoly, the situation is changing: each oligopolist, when determining the strategy of his economic behavior, must take into account the behavior of both consumers of his products and competitors who operate with him in the same market. Consequently, the central problem of oligopoly is that the firm needs to take into account the response to its actions from competing firms. This reaction is usually ambiguous and unpredictable. A new complicating factor is emerging in the oligopolistic market - interdependence. No oligopolist will change the pricing policy of his firm until he calculates the likely moves of other firms and the expected reaction of competitors. Scarcity, which gives rise to universal interdependence, is a unique property of oligopoly. Therefore, the oligopolist must build his strategy of behavior in the market, taking into account not only his own goals, data of market conditions, but also the results of forecasting the reciprocal behavior of competitors. Taking this into account, firms in the oligopolistic market must make decisions about the volume of production, price, advertising, renewal of the assortment, etc. All this complicates the decision-making process.

A theoretical analysis of the behavior of a firm in an oligopoly is also difficult. There is no general, universal theory of oligopoly, because:

- oligopoly is a variety of special market situations in a wide range (from rigid to vague oligopoly, with or without collusion). Different types of oligopolies do not fit into one model;

- the presence of interdependence leaves an imprint on the market situation: the oligopolist does not always correctly assess the actions of competitors, demand and marginal revenue, therefore it is difficult to determine the optimal price of products and the volume of production, the conditions for maximizing profits.

In economic theory, several models of oligopoly have been developed that describe specific economic situations. All models have common features. Let's consider the main ones.

Models of oligopoly without collusion.

1. Cournot model. This is one of the first models of oligopoly in the form of a duopoly. Such a model is often implemented in regional markets and reflects all the characteristic features of an oligopoly with three, four or more participants (Figure 7.16).

Rice. 7.16. Cournot model

In 1838 the French mathematician and economist O. Cournot proposed a model of duopoly, which was based on three premises:

- there are only two firms in the industry;

- each company takes the volume of production for granted;

- both firms maximize profits.

Suppose that the cost of producing a unit of a product does not depend on the volume of production and is the same for both manufacturers.

Therefore, MR1 = MC2; dd1 and dd2 are the lines of demand for the products of the first and second manufacturers, respectively.

O. Cournot divides the time of existence of the duopoly into several periods:

- in the initial period, only the first firm produces products, which means that a situation of monopoly arises. The monopolist has a demand line dd1 and a marginal revenue line MR1. Striving for the maximum profit (MR1 = MC1), the firm will choose the volume Q1 and the price P1;

- in the second period, the second will join the first firm (monopolist) and a duopoly will arise. The first firm will lose its monopoly position. The second firm, upon entering the industry, will consider the price and volume of production of the first firm as given, it will produce less output: its demand is characterized by the dd2 line and the marginal revenue MR2. The volume of Q2 is determined by the intersection of the MC2 and MR2 lines, the price of P2 (at the intersection with dd2). The price of the second firm is lower to entice consumers. In this situation, the first company, in order not to give up its market niche, will have to sell its products at the price P1 = P2;

- in the third period, the active role will again pass to the first firm.

It will take Q2 as the given value and form a new demand function dd3. At the intersection of Q2 and MR1, we find point E, through which dd3 will pass parallel to the previous demand lines. Similarly, the production process will develop in subsequent periods as well, alternately one or another duopolist will be included in it.

O. Cournot proved that the market situation is developing from a monopoly to an oligopoly. If the number of participants in an oligopoly continues to grow and each of them strives to achieve a temporary gain, then there will be a tendency for a transition from oligopoly to free competition. With free competition, each firm will maximize profits with volume when MR = MC = P. Development of an oligopoly in the direction of free competition is possible, but not necessary.

Such a transformation will give an overall decrease in profits, although in the very process of transition from one market model to another, each of the producers may receive a temporary gain. The main emphasis in the Cournot model is placed on the strong interdependence of firms, the interdependence of their behavior. Each company takes the situation for granted, to strengthen the market, it lowers the price and recaptures a new market segment. Gradually firms come to such a division of the market, which corresponds to the balance of their forces.

General conclusions from the Cournot model:

- under a duopoly, the volume of production is greater than under a monopoly, but less than under perfect competition;

- the market price under a duopoly is lower than under a monopoly, but higher than under free competition.

2. Chamberlin's model. E. Chamberlin in his work The Theory of Monopolistic Competition (1933) proved three theorems that reveal the types of behavior of oligopolists.

Theorem 1. If sellers do not take into account mutual dependence and believe that the competitor's supplies will remain unchanged in any case, then as the number of sellers grows, the equilibrium price will decrease below the monopoly equilibrium price and reach a purely competitive level, when the number of sellers tends to infinity (fig. 7.17).

Rice. 7.17. Chamberlin's model

Take the demand line DD1, the market capacity will be equal to OD1. If the oligopoly is considered as a duopoly, then each seller is able to put on the market the second part of the OD1 market capacity (point E). If the first seller enters the market, then he sells all his products in the volume of OA, the monopoly price of PE is set on the market. If the costs in the industry are fixed, then this price will be monopoly. The profit of the first firm will be equal to the area of the OAEPE rectangle (the shaded area).

The second firm in the industry has a market size of AD1. From point E draw line MR2 parallel to line MR1. The price of the second firm will be equal to PC, the profit will be equal to the area of the rectangle ABCF. As a result, the second competitor will increase the volume of sales in the market to the value of OV; the price will fall to PC, and at the same time, the profit of the first firm will decrease to a value equal to the area of the OPCFA rectangle, therefore, the profit of the first firm will decrease by half - from OPEEA to OPCFA. The position of the first firm became suboptimal, with sales too large for the market left at its disposal. In order to get to the optimal point, he reduces the volume of sales to half the capacity of his market. At the same time, the second company will expand its sales volume by half of the vacated market capacity, and the process will continue indefinitely.

Market share that will take:

- first seller: 1–1 / 2 - 1/8 - 1/32 = 1/3 OD1;

- second seller: 1/4 + 1/16 + 1/64 = 1/3 OD1.

Together they will provide two-thirds of OD1, therefore, the market will be saturated by two-thirds of its volume.

The share of each seller is 1 / (n + 1); n is the number of sellers.

Total revenue TR = n / (n + n); n> ¥.

When n> ¥, market saturation tends to the value of its capacity OD1, and the price tends to zero.

Theorem 2. If each seller proceeds from the assumption that the price of his competitor remains unchanged, then the equilibrium price (if there is more than one seller) is equal to a purely competitive price:

- if each competitor assumes that the price of his opponent will be unchanged, then he will reduce the price to a level lower than the price of the competitor, and will attract his buyers to his side;

- the first competitor is likely to do the same: he will lower the price in comparison with the price of the competitor and attract buyers to him. Competitive price-beating will continue until they have all of their products on the market and the price is competitive.

E. Chamberlin draws important conclusions from the first two theorems:

- if one of the sellers keeps the size of his offer unchanged, then the second seller is able to undermine its price by his maneuvers;

- if the first seller keeps his price unchanged, then his sales volume becomes vulnerable.

Theorem 3. If sellers take into account their total influence on the price, then the price will be monopoly, it will be established at the PE level and the OA of the product will be sold (see Fig. 7.17). Sellers adjust to each other in terms of sales volume. Proof: if the first competitor starts with sales of OA, then the second will produce volume of AB; then the first competitor will halve the volume of sales and the total volume of OA will bring the monopoly price P. This price will be stable, since, retreating from it, any competitor damages not only the opponent, but also itself. If the number of sellers increases, but all of them take into account their indirect influence on other sellers, then the price will not decrease, and the volume of production will not increase. However, if there are a lot of manufacturers and they do not take into account the interdependence of each other, then the price will begin to decline, and the volume of sales will approach the maximum value of OD1.

If the number of sellers increases, then the price will become competitive, and a break point will arise. In conditions of oligopoly, prices do not change often, usually at some intervals and by a significant amount. This "immobility" of prices occurs when firms are faced with cyclical or seasonal fluctuations in demand, which are factored into pricing. Oligopolists usually do not change the price of goods, but react to changes in demand by decreasing or increasing output. This is most beneficial because price change is associated with significant costs (change of price lists, costs of notifying buyers, loss of customer confidence).

Notes on theorems:

1. Many antitrust laws provide for sanctions in case of collusion of oligopolists, as well as if they, without collusion, pursue a policy that the court recognizes as monopoly.

2. Theorems 1–3 are proved proceeding from the assumption that the mutual adaptation of competitors occurs instantly. But if there is a time gap between the action and the reaction (the act of adjustment), then the seller who first breaks the equilibrium gains an advantage over other sellers as a result of the price reduction. The competitor's assessment of this advantage is usually proportional to the period over which it is going to be in the market.

If in an oligopolistic industry there is general interdependence between firms, but there is no collusion, then the location and shape of the demand curve for these products will have a specific form.

3. Model of a broken curve of demand for oligopoly products.

At the beginning of the twentieth century. the attention of theoretical economists was attracted by the fact that prices in some oligopoly markets have remained stable for a long time. For example, in the United States, railroad prices have not changed for decades, although both demand and costs have changed.

To explain this situation, a model of a broken line of demand for the products of an oligopolist was proposed. Firms-competitors can equalize their prices following the changes of the first firm, or they can ignore its actions, do not pay attention to them.

Suppose that one of the oligopolists at some point has a certain demand and price corresponding to point E (Fig. 7.18). Point E is set, but the model does not explain how this combination of volume and price has developed. The DD1 demand line is relatively inelastic; the oligopolist is not inclined to take risks, he will take risks only when the price change gives him a big gain.

Rice. 7.18. Broken demand curve for oligopoly products

An analysis of the oligopoly's activities shows that price reductions will be evened out, since competitive firms will try to prevent the price-cutting oligopolist from taking consumers away from them. At the same time, a similar rise in prices will not follow the oligopolist, since the competitors of the price-raising firm will try to re-win the consumer confidence that was lost as a result of the price increase.

The oligopolist's line of reasoning boils down to the following:

- if the price is reduced, then my competitors, expecting a reduction in their sales, will do the same; therefore, few will benefit from the price reduction, because demand line DD1 has a steep slope;

- if I raise the price, but competitors do not do this, then the company will lose buyers, the elasticity of demand will increase and the demand curve will become flatter - the NOT line. The DE line will take the position NOT and, as a result, the demand line will become HED1.

Thus, the demand line in the subjective perception of a risk-averse oligopolist has a break at point E. The segment NOT of the demand curve will characterize a situation when competitors “ignore” price increases; and the segment ED1 will characterize a situation when competitors "follow suit" and reduce prices. A break in the demand line HED1 means there is a gap, so the oligopolist is faced with a “broken demand curve”. In the area above the current price, the curve is highly elastic (NOT); in the area below the current price (ED1), the curve is less elastic or inelastic. A break in the demand line means there is a gap in the marginal revenue line МR, which is also represented by a broken line and consists of two segments - HL and SK. Due to the sharp differences in the elasticity of demand above and below the point of the current price, a gap occurs, which can be considered as a vertical segment LS in the marginal revenue curve, therefore, MR = HLSK.

It is important that MR = MC. Let the initial marginal cost line occupy position MC1 (with QE and PE). If the prices for raw materials rise, then the costs of the oligopolist will rise and the curve MC1 will go up and move to MC2 (for this position, the combination of the volume of production and the price will be the same). The oligopolist decides to change the price when the point of intersection of MR and MC3 is outside the vertical section (to the left of point E) of the MR line. This corresponds to the MC3 curve in the figure at volume Q3. With a slight change in cost or demand, the oligopolist will not change the price.

The considered model serves to explain the relative stability of prices in oligopolistic markets in the presence of inflation:

- a broken demand curve shows that any change in price will lead to the worst: if profits increase, buyers will leave, if profits fall, then costs can exceed the growth of gross income. In addition, a "price war" may arise: competing firms will further reduce the price and there will be a loss of buyers;

- the broken curve of the marginal revenue MR means that, within certain limits, significant changes in costs (from S to L) will not have any effect on the values of Q and P.

This explains why an oligopoly that does not have a secret collusion prudently does not change prices abruptly, makes them inflexible.

Keeping prices at the same level is effective only in the short term; for the long term, it is unacceptable.

Oligopoly in the short run. The ability to keep prices in the short run is inherent in the very behavior of oligopolistic firms: when planning production, they prepare it in advance for an increase or decrease in demand. Usually, an oligopolist has a special (saucer-shaped) AVC curve (Fig. 7.19): on the interval (Q1 - Q2) AVC = MC = const.

Rice. 7.19. Oligopoly in short

Usually, based on market research, firms determine their "normal" demand curve (DDH), which reflects how much of a product on average they can sell in the market at each price. Knowing the potential demand, the firm installs the equipment, determines the “normal” price from the “normal” demand curve. Since the maximum profit is at the point corresponding to MR = MC, and MC coincides with AVC, the intersection of MR = AVC (point A) is most beneficial to the oligopolist. In case of fluctuations in demand around DDH within the Q1 - Q2 section, we obtain the demand lines D1 and D2; the price remains “normal” and unchanged, while the volume of production changes from Q1 to Q2. It should be noted that holding prices is advisable if, for certain volumes of output, it is possible to keep constant AVC; if the firm has the classic AVC parabola (without a flat section), then attempts to keep the price and a drop in production with a decrease in demand will lead to losses.

Oligopoly in a long period has not yet received a theoretical description, because it is necessary to know the reaction of competitors to possible price changes. Since their actions do not lend themselves to determination, scientists have not yet succeeded in creating a unified theory of the behavior of an oligopolistic company in the long run.

4. Game theory model.

Game theory was proposed by J. Neumann and O. Morgenstern (1944). Its application to the analysis of oligopoly is very fruitful. Game theory views the behavior of firms in the marketplace as a game in which all participants make decisions in accordance with certain rules. When making decisions, the participants in the game do not know exactly what strategy the opponent will choose. The reliability of the predictions in the game depends on its result for the participant - prizes (profit) or penalties (losses). The so-called “prisoner's dilemma” serves as an analogue of the game situation in the oligopolistic market.

Matrix of prizes and fines for two prisoners in one case:

Suppose that the prisoners cannot come to an agreement and choose the best position - not to confess and receive one year probation on the basis of circumstantial evidence. How should the first (A) behave if he does not know the reaction of the second (B)?

There are behavioral strategies: max – min and max – max.

The max – min strategy characterizes a pessimistic outlook on life, when A believes that B will act in the worst way (blame A). The worst option for A is - A does not confess, and B “snitches”.

To avoid this and ensure a less bad result, A confesses (“knocks”). If B does not admit this, then A has freedom, and B goes to prison for a full term. If B argues in the same way, then it will be more profitable for him to confess. If both accept the blame, then the term is reduced from ten (potential years) to five years for each. Without saying a word, smart prisoners admit their guilt (less bad result than ten years).

The max – max strategy attracts optimists. Prisoner A thinks it is better to be free or to sit for a shorter period. He confesses, expecting the other to confess. If B does the same, then both repent of their deeds (term of five years). The players made the same decisions and ended up in the lower right corner of the matrix. This outcome is called the "Nash solution" or "Nash equilibrium". The conditions for this equilibrium are as follows: if the strategy of the first player is given, then the second only has to repeat the move of the first, and vice versa. A similar choice in decision-making arises in the market when oligopolistic firms decide whether to reduce the price or not, to advertise or not, etc.

The strategy of the two firms:

If firms A and B advertise a product, then the profit will be 50 units, if one of them advertises, and the other does not, then the advertising company gains a competitive advantage and increases profits to 75 units, and the other will incur losses (-25 units) ... If both firms have advertising, then the profit will be 10 units. (since advertising itself is expensive and the overall effect is lower by the amount of costs).

The pessimistic approach is to find the best option among the bad ones. The firm compares the numbers 10 and -25 and selects advertising with all its costs (not to win, but not to lose!). An optimistic approach is looking for the best possible option. Better to get 75 units. profit, they are compared with 50 units. and choose advertising. Advertising war is a zero-sum war.

5. Model of competitive markets.

The premise of this model is the assumption that entering and exiting an industry is free. In fact, the creation of a company and its liquidation are associated with significant difficulties (costs). If, in theory, the absence of barriers is recognized, then the threat of invasion by competitors becomes real. Large oligopolists may lose their market power. The threat of competition acts on oligopolies in such a way that there is a desire to reduce the overall level of costs, the level of prices, and to increase the volume of production. This leads to a decrease in economic profit and the preservation of only normal (accounting) profit.

6. Model of collusion.

In conditions of perfect or monopolistic competition, there are many firms that cannot come to an agreement and compete with each other (in the form of price and non-price competition). There are few firms in the oligopolistic industry, and they can always agree on a joint strategy and tactics, on prices, and on the division of the market. By collusion, firms determine the optimal share of each participant in industry production. At the same time, the market develops according to the monopoly type and the total volume of sectoral profits increases due to the rise in prices and a decrease in the volume of production (in comparison with the market of perfect competition).

Consider how the price P and the volume Q are determined in collusion (Fig. 7.20).

Assume that all firms in an industry produce similar products, have the same cost curves, and level out their prices. Suppose the demand curves of all firms are the same. Under the conditions of collusion, it becomes profitable for each company to equalize the price and receive the maximum profit (painted area with KREEM) with the volume of QE. For society, the result of collusion will be the same as if the industry were monopolized.

Rice. 7.20. The collusive oligopoly model

An agreement can take many forms, the simplest of which is a cartel (written agreement on prices and production volumes). Researchers of market structures assess cartel agreements ambiguously, referring them to oligopoly or monopoly. From the standpoint of antitrust legislation, the attitude towards the cartel is also ambiguous. In a number of countries, collusion over prices and quotas is prohibited. But at the international level, such well-known cartels as OPEC (Organization of Petroleum Exporting Countries) function successfully. His activities had a significant impact on the oil market in 1970-1990. (by decreasing the volume and increasing the price). There is also another oil cartel, called the Seven Sisters, a collection of five American oil companies, one British and one Anglo-Dutch company. The German AEG cartel operates in the electrical equipment industry.

For the stability of the cartel agreement, a number of conditions must be met:

- the demand for the cartel's products should be price inelastic, and the product itself should not have close substitutes;

- all members of the cartel must comply with certain rules of the game.

A company that violates the terms gains a competitive advantage, but loses relationships with partners.

Currently, the importance of price competition has decreased; antitrust laws have become more stringent, so the importance of the cartel in its classic form has diminished. Modern cartels do not touch upon the issues of prices and volumes in the agreement, but relate to the conditions for joint implementation of large-scale investment projects, joint use of equipment. Legal cartels are increasingly prone to conspiracy.

7. Model of conspiracy.

Collusive oligopoly occurs when firms reach an explicit or tacit (implicit) agreement to fix prices, to divide or distribute markets. Collusion removes uncertainty, prevents price wars, and erects barriers to new competitors entering the industry.

According to P. Samuelson and J. Galbraith, modern firms do not need to enter into open contracts. A well-organized information service allows you to keep abreast of the affairs of companies in the industry, to know their capabilities, goals, interests and, on the basis of this information, to develop a strategy that is beneficial to everyone.

There are several forms of collusion.

Price leadership model. This situation is characteristic of a vague oligopoly, when one of the largest firms stands out among a large number of firms, which plays the role of a clear leader. The leader determines the pricing policy, which is supported by all other firms in the industry. The leader sets the price in a way that is in the best interest of all firms, even those with high costs. In such a situation, the leader receives super-profit. If the leader lowers the price, then small firms cannot withstand the competition and leave the market. After that, the leader raises the price and expands his market niche.

The position of a leader can shift from one firm to another. The type of leadership in general is the model of the firm-barometer. This position is claimed by a company that does not dominate in terms of production volume, but has a certain prestige in the industry. Her behavior, incl. price, is a benchmark for other oligopolistic firms.

Thumb Rule Model. When there is no clear price leader, firms can follow simple rules of thumb for pricing.

The first rule is pricing based on average AC costs.

In practice, a certain amount (for example, 10%) is added to the AU, which will be the profit of the oligopolist. The price of the product will be determined according to the cost plus rule, i.e. average costs plus profit margins. With a change in the value of the AC, the price automatically changes.

The second rule is the establishment of some familiar price levels (for example, 19.99; 39.95 ...). Step prices are widely used, but traditional prices are used as steps. This practice applies to sales.

Collusion models exist in the form of so-called "gentlemen's agreements", when the parameters of the agreement (collusion) are not fixed anywhere, they are formed at the level of an oral agreement.

Only in this form can it act as a secret treaty. At the same time, conspiracy in the oligopolistic market is unstable, since there are objective conditions conducive to its violation.

Obstacles to Collusion:

1. Differences in demand and costs. It is very difficult to reach an agreement on a price when oligopolists have large differences in demand and costs. In this case, firms will maximize profits at different prices and a single price will be unacceptable for all firms; therefore, it is very difficult to come to an agreement, it will infringe on someone's interests.

2. The number of firms. The more firms in an oligopolistic industry, the more difficult it is for them to reach an agreement; This is especially difficult for a "vague" oligopoly, where the competitive outskirts will not agree to a secret price agreement due to the large number of firms and insignificant sales volumes for each manufacturer.

3. Fraud. Every firm in the oligopolistic industry seeks to gain temporary advantages, for which it attempts to covertly (if there is collusion) to lower prices and attract buyers from other firms. As a result of such fraud, additional units of products are sold on terms of price discrimination. For this additional production, MR = P and the firm will be profitable until P = MC. However, secret price discounts may be revealed; the fraud will come out and lead to a price war between oligopolists. Consequently, the use of secret price discounts is an obstacle to collusion.

4. The downturn in the industry prompts firms to respond to reduced demand by lowering prices and attracting additional buyers at the expense of competitors in order to increase their own profits and improve the efficiency of their production capacity. Firms attempting to stay afloat in this way in a downturn usually breaks down collusion.

5. Opportunities for other firms to enter the industry will become more attractive because under the conditions of collusion, prices and profits rise. However, the attraction of other firms to the industry will cause an increase in market supply, will have a downward impact on prices and profits. If blocking entry into an oligopolistic industry is unreliable, then the conspiracy will not last long and prices will fall.

6. Legal Barriers: Antitrust laws in several countries prohibit collusion and prosecute it. However, secret agreements are made orally in an informal setting. They fix the price of the product, the quotas of the sellers, which is expressed in non-price competition. Such agreements are difficult to detect and lawful to apply to them.

The special position of the oligopoly in the competitive market structure between pure monopoly and pure competition determines the specifics of oligopolistic competition. As all the considered models of oligopoly show, with a given market structure, there are no allocative and production efficiency (P> MC and P> AC). The degree of competition restriction and market monopolization is high. Oligopolistic barriers impede the flow of capital. The role of the oligopoly in scientific and technological progress is also ambiguous: on the one hand, a high level of industrial competition acts as an engine of technological progress, provides more funding for R&D, and the use of high technologies. But, on the other hand, there is an inefficient use of resources. In general, oligopolies characterize a very important structural unit of the market economy.

7.5. MONOPOLISTIC COMPETITION

Monopoly competition is a common type of market; it is an intermediate market model between oligopoly and perfect competition. Monopolistic competition is a market in which many firms sell a differentiated product, access to which is relatively free, and each firm has some control over the selling price of the product it produces in conditions of significant non-price competition.

The main features of the monopolistic competition market are as follows:

- there are a large number of small firms on the market;

- a separate company offers an insignificant (in comparison with the industry) volume of products on the market;

- firms produce a variety of (differentiated) products;

- the demand for the products of a monopolistic competitor is not absolutely elastic, but its elasticity is quite high;

- although the product of each company is specific in some way, the consumer can easily find substitute products and switch his demand for them;

- insignificant opportunity to influence or control the price;

- there are practically no barriers to the inflow of new capital, therefore the entry of new firms into the industry is not difficult, does not require significant initial capital investments;

- the level of market competition is quite high;

A characteristic feature of a firm in a monopolistic competition is the specificity of the product. There are many substitute products (substitutes) for a firm's product, but product differentiation (real or imaginary) in a monopolistic competition makes it virtually unique. An example of markets for monopolistic competition are the markets for clothing, footwear, cosmetics, alcoholic and non-alcoholic beverages, coffee, medicines, etc. Through wide (often aggressive) advertising, the manufacturer informs consumers about the benefits of his product. Patenting of trademarks, industrial marks, etc. allows you to consolidate the advantages and uniqueness of the product, which gives the firm the ability to influence prices and gives it some of the features of a monopoly.

In the short run, the behavior of a monopolistically competitive firm is similar to that of a monopoly, but there are some differences from other market structures. Compared to a purely competitive firm, a monopoly competitor has a higher price and lower volume, and vice versa than a monopoly. The demand line for the products of the firm of a monopolistic competitor is less elastic compared to the demand line of a perfect competitor, but more elastic compared to the demand line of the monopolist or the industry as a whole. The demand line for the products of the firm of a monopolistic competitor is less elastic compared to the demand line of a perfect competitor, but more elastic compared to the demand line of the monopolist or the industry as a whole. Price control allows a monopolistic competitor to raise the price of a product without losing demand for it from regular customers. To attract additional customers and increase sales, the firm needs to lower the price. In this regard, the marginal revenue of the firm of the monopolistic competitor is not equal to the price, and the marginal revenue line is located below the demand line.

The firm chooses a combination of demand and price that allows it to maximize profits, provided that MR = MC (Fig. 7.21).

Rice. 7.21. Equilibrium of a Monopolistically Competitive Firm

If the demand for products is insufficient, then losses are possible (Fig. 7.22).

Rice. 7.22. The firm is a monopoly competitor -

in a loss situation

The area of the PMMAPA rectangle quantifies the amount of losses. If the price is higher than the average variable costs, then the firm will be able to minimize losses by producing products in the volume at which MR = MC. If the price does not cover the average variable costs, then the firm should stop production.

The behavior of the firm in the long run becomes somewhat more complex as barriers are low and entry is virtually free. The presence of economic profit creates an attractiveness for new firms that want to open their own production. The equilibrium price is set at the level of average costs, so the firm loses economic profit and in the long run receives only normal profit.

In conditions of monopolistic competition, production efficiency and efficiency of resource allocation (allocation) are not achieved. A monopoly competitor is underproductive and overpriced compared to a competitive firm. Especially a lot of criticism is made against unnecessary and boring advertising for all, which is an integral part in all their diversity, leading to an increase in the standard of living of the population. Product differentiation can improve product quality and increase production efficiency.

BASIC CONCEPTS AND TERMS

Competition, competition as a process, competition as a situation, functions of competition, the model of "five forces of competition", functional competition, specific competition, inter-firm competition, intra-industry and intersectoral competition, perfect and imperfect competition, price and non-price competition, unfair competition, sectoral structure of the market , quasi-competitive market, pure competition, the condition for maximizing the profit of a competitive firm, allocative efficiency, pure monopoly, natural monopoly, artificial monopoly, state monopoly, monopsony, discriminatory monopoly, bilateral monopoly, oligopoly, duopoly, oligopsony, product differentiation, competition with a barrier industry entry, concentration and centralization of production and capital, price discrimination, antitrust laws, mergers and cartels.

The market economy is a complex and dynamic system, with many connections between sellers, buyers and other participants in business relationships. Therefore, markets, by definition, cannot be homogeneous. They differ in a number of parameters: the number and size of firms operating in the market, the degree of their influence on the price, the type of goods offered, and much more. These characteristics determine types of market structures or otherwise market patterns. Today it is customary to distinguish four main types of market structures: pure or perfect competition, monopolistic competition, oligopoly and pure (absolute) monopoly. Let's consider them in more detail.

Concept and types of market structures

Market structure- a combination of characteristic industry characteristics of market organization. Each type of market structure has a number of characteristic features that affect how the price level is formed, how sellers interact in the market, etc. In addition, the types of market structures have varying degrees of competition.

Key characteristics of types of market structures:

the number of selling firms in the industry;
size of firms;
number of buyers in the industry;
type of goods;
barriers to entry into the industry;
availability of market information (price level, demand);
the ability of an individual firm to influence the market price.

The most important characteristic of the type of market structure is level of competition, that is, the ability of a single selling company to influence the general market conditions. The more competitive the market, the lower the opportunity. Competition itself can be both price (change in price) and non-price (change in the quality of goods, design, service, advertising).

Can be distinguished 4 main types of market structures or market models, which are presented below in descending order of the level of competition:

perfect (pure) competition;
monopolistic competition;
oligopoly;
pure (absolute) monopoly.

A table with a comparative analysis of the main types of market structure is shown below.

Table of the main types of market structures

Perfect (pure, free) competition

The market for perfect competition (English "Perfect competition") - characterized by the presence of many sellers offering a homogeneous product, with free pricing.

That is, there are many companies on the market offering homogeneous products, and each selling company, by itself, cannot influence the market price of these products.

In practice, and even on the scale of the entire national economy, perfect competition is extremely rare. In the XIX century. it was typical for developed countries, but in our time, only (and then with a reservation) agricultural markets, stock exchanges or the international currency market (Forex) can be attributed to the markets of perfect competition. In such markets, a fairly homogeneous product (currency, stocks, bonds, grain) is sold and bought, and there are a lot of sellers.

Features or conditions of perfect competition:

number of sales firms in the industry: large;
the size of the selling firms: small;
product: uniform, standard;
price control: none;
barriers to entry into the industry: practically nonexistent;
methods of competition: only non-price competition.

Monopolistic competition

Market of monopolistic competition (English "Monopolistic competition") - characterized by a large number of sellers offering a varied (differentiated) product.

In conditions of monopolistic competition, entry to the market is fairly free, there are barriers, but they are relatively easy to overcome. For example, to enter the market, a firm may need to obtain a special license, patent, etc. The control of the selling firms over the firms is limited. The demand for goods is highly elastic.

An example of monopolistic competition is the cosmetics market. For example, if consumers prefer Avon cosmetic products, they are willing to pay more for it than for similar cosmetics from other companies. But if the difference in price is too large, consumers will still switch to cheaper counterparts, such as Oriflame.

Monopolistic competition includes the markets of the food and light industries, the market for medicines, clothing, footwear, and perfumery. Products in such markets are differentiated - the same product (for example, a multicooker) may have many differences from different sellers (manufacturers). Differences can manifest themselves not only in quality (reliability, design, number of functions, etc.), but also in service: availability of warranty repairs, free shipping, technical support, payment by installments.

Features or features of monopolistic competition:

number of sellers in the industry: large;
firm size: small or medium;
number of buyers: large;
product: differentiated;
price control: limited;
access to market information: free;
barriers to entry into the industry: low;
methods of competition: mainly non-price competition, and limited price competition.

Oligopoly

Oligopoly market (English "Oligopoly") - characterized by the presence on the market of a small number of large sellers, whose goods can be either homogeneous or differentiated.

Entering an oligopolistic market is difficult, and barriers to entry are very high. The control of individual companies over prices is limited. Examples of oligopoly are the automobile market, the markets of cellular communications, household appliances, and metals.

The peculiarity of the oligopoly is that the decisions of companies on the prices of goods and the volumes of their supply are interdependent. The market situation strongly depends on how companies react when the price of products changes by one of the market participants. Possible two kinds of reaction: 1) follow-up reaction- other oligopolists agree with the new price and set prices for their goods at the same level (follow the initiator of the price change); 2) reaction of ignoring- other oligopolists ignore the price change by the initiating firm and maintain the same price level for their products. Thus, the oligopoly market is characterized by a broken demand curve.

Features or oligopoly terms:

number of sellers in the industry: small;
firm size: large;
number of buyers: large;
product: homogeneous or differentiated;
price control: significant;
access to market information: difficult;
barriers to entry into the industry: high;
competitive methods: non-price competition, very limited price.

Pure (absolute) monopoly

Pure monopoly market (English "Monopoly") - is characterized by the presence on the market of a single seller of a unique (having no close substitutes) product.

Absolute or pure monopoly is the exact opposite of perfect competition. Monopoly is the market for one seller. There is no competition. The monopolist has full market power: it sets and controls prices, decides how much of a product to offer to the market. Under a monopoly, the industry is essentially represented by just one firm. Market entry barriers (both artificial and natural) are almost insurmountable.

The legislation of many countries (including Russia) fights against monopolistic activities and unfair competition (collusion between firms in setting prices).

Pure monopoly, especially on a national scale, is a very, very rare phenomenon. Examples are small settlements (villages, townships, small towns), where there is only one store, one public transport owner, one railway, one airport. Or natural monopoly.

Special varieties or types of monopoly:

natural monopoly- a product in the industry can be produced by one firm at a lower cost than if many firms were engaged in its production (example: utilities);
monopsony- there is only one buyer in the market (monopoly on the demand side);
bilateral monopoly- one seller, one buyer;
duopoly- there are two independent sellers in the industry (such a market model was first proposed by A.O. Cournot).

Features or monopoly terms:

number of sellers in the industry: one (or two, if we are talking about a duopoly);
firm size: various (usually large);
number of buyers: different (there can be many or a single buyer in the case of a bilateral monopoly);
product: unique (has no substitutes);
price control: complete;
access to market information: blocked;
barriers to entry into the industry: almost insurmountable;
methods of competition: absent as unnecessary (the only thing is that a company can work on quality to maintain its image).

Galyautdinov R.R.