How Oligopoly determines decision making regarding:
Pricing and Output
In a case where the industry is made up of few firms, with each of them dealing in identical products, while at the same time owning powerful influence on the total market, there will be an appreciable effect on each firm’s price and policy, leading to a collusion (Boyes, 2013).
On the other hand, if there is product differentiation, the company will get forced to either raise or lower the price with no fear of losing the customer base or having any immediate reaction from other market rivals.
Advertising
In the case where the firms in the oligopoly are all dealing with identical types of commodities, the company will get forced to venture into better forms of advertisements such intense use of the internet, or personal persuasion methods to convince more customers to go for the organization’s products and services (Boyes, 2013).
Resources
In the oligopoly market, there is a misallocation of resources. Oligopoly market may be in the form of either collusive or non-collusive oligopoly. The case of a non-collusive oligopoly is likely to result in greater misallocation, as well as wastage of resources (Boyes, 2013).
Oligopoly theory
There exist around four theory models regarding oligopoly: The Cournot model displays that there is steadiness in the demand curve as a result of the fixed output from the competitors. As a result, the firm gets forced to make an own production decision. The Stackelberg is a form of a modified Courtnot. The Bertrand model focuses on the price reactions of the firms in the oligopoly. In this model, the equilibrium can get changed to a higher position if the enterprise can gain higher profits through the introduction of a new price in the market. Lastly, the Sweezy model holds that the competitors in the oligopoly markets follow the price decrease and not the price increase (Garzone, & Ilie, 2014).
The Kinked demand curve tries to explain how the competing firms tend to follow the price reductions, and not the price increases, to maintain their market shares. The move enables their market shares to increase at the expense of their rivals. There exist a difference between the theory of the kinked demand curve and that of other approaches in the market (Garzone, & Ilie, 2014).
The work of the price discrimination is to increase the seller’s revenue. The government states that any firm has the freedom of taking part in price discrimination, unless it may lead to the rival companies falling out of the business. For the price discrimination to take place there should be conditions like the imperfect competition, different forms of elasticity of demand, as well as the separation of markets.
There can be the existence of price discrimination with the airline ticket due to some reasons. First, the prices of the plane ticket can get lowered when the flight is nearing its deadline. Such a move is necessary since there can be the possibility of having a small marginal cost regarding the next, extra passenger. On the other hand, the price discrimination on the movie theatre tickets to prevent adult clients from using the kids’ cards. Additionally, prices can get lowered to those customers that buy on wholesale with an effort to of reselling the items to earn a profit, while the same rates will get raised on those customers that purchase products as end consumers. Finally, prices get lowered on discount coupons to encourage the client to continue buying the item from the firm (Garzone, & Ilie, 2014).