Oligopolistic competition and Ethics… Manish Das Dept. of Business Management Tripura University.

Introduction.. Most major industrial market are dominated by three to eight firms. Such markets are in between perfect competition and monopoly market in the market spectrum. This impure type of market structures are popularly known as imperfectly competitive market.oligopoly is one form of imperfectly competitive market. In an oligopoly, two of seven conditions of perfectly free competitive market are not present. They are 1)instead of many sellers there are a few significant sellers. The most market is shared by a relatively small number of firms who together can influence significantly in the price. 2) Other sellers are not able to freely enter into the market.

Contd… Oligopoly markets, which are dominated by a few (3-8) large firms, are highly concentrated. Although oligopoly can be formed because of various reasons, one of the common cause for that is horizontal mergers (two or more competing companies unifies).if enough companies in a competitive industry merge, the industry can become an oligopoly composed of a few large firms.

How do oligopoly affect the market? Since highly concentrated oligopoly has a small number of large firms, it is relatively easy for the managers of the firms to join forces and act as an unit. By explicitly or tacitly agreeing to fix their prices at the same levels and to restrict their output accordingly oligopolists can function as a single firm. It can create entry barriers just like monopoly by employing the collectivism. Thus, oligopoly markets like monopoly can fail to exhibit just profit levels, can generate a decline in social utility, and can fail to respect basic economic freedoms.

Explicit Agreements.. The managers of few firms operating in an oligopoly can meet and jointly agree to fix prices at a level much higher than what each would be forced to take in a perfectly competitive market. The greater the degree of market concentration present in an industry, the fewer the manager needs to brought into such price-fixing agreement. If the justice, freedom and social utility that competitive markets achieve are important values for society, then it is crucial that the managers in the oligopoly market refrain from engaging such practices.

Contd…. Price-fixing: when firms operate in an oligopoly market, it is easy enough for their managers to meet secretly and agree to set their prices at artificially high levels. Manipulation of supply: firms in an oligopoly industry might agree to limit their production so that prices rise to levels higher than those that would result from free competition. Such manipulation of supply also results in market shortages. Exclusive dealing agreements: a firm institutes an exclusive dealing arrangement when it sells to a retailer on condition that the retailer will not purchase any products from other companies and/or will not sell outside a certain geographical area.

Contd…. Retail price maintenance agreements: if manufacturer sells to retailers only on a condition that they agree to charge the same set of retail prices for its goods, it is engaging in retail price maintenance. Price discrimination: to charge different prices to different buyers for identical goods or services is to engage in price discrimination. Price differences are legitimate only when based on volume differences or other differences related to the true cost of manufacturing, packaging, Marketing, transporting or servicing goods.

Why business engage in such anticompetitive practices? Several factors that are responsible are 1)A crowded and mature market.. 2)Job-order nature of business. 3)Undifferentiated products. 4)Culture of the business. 5)Personnel practices. 6)Trade associations.

Tacit Agreements… When the prices in an oligopoly market are set by implicit understanding, then it is known as tacit agreements. Tacit agreements are hard to define and also very hard to proof. In this type of agreements, one party is recognized as price leader and others silently follow the leaders move.

Three important views on oligopoly power…. The Do-Nothing View (no requirement of concern for such oligopoly). The Antitrust View (breaking large trusts into smaller units). The Regulation View (regulate the firms).