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An oligopoly is a market structure in which a few firms dominate the market - Leaving Cert Economics - Question 2(a) - 2018
Question 2(a)
An oligopoly is a market structure in which a few firms dominate the market. (i) Describe how firms in this market structure compete with each other. (ii) Discuss ... show full transcript
Worked Solution & Example Answer:An oligopoly is a market structure in which a few firms dominate the market - Leaving Cert Economics - Question 2(a) - 2018
Step 1
Describe how firms in this market structure compete with each other.
Answer
In an oligopoly, firms typically engage in non-price competition due to the presence of close substitutes. Competitive strategies include:
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Product Differentiation: Firms strive to distinguish their products from those offered by competitors through branding and quality improvements, making each firm's offerings unique.
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Advertising and Promotions: Heavy investment in advertising helps increase brand recognition and customer loyalty. Promotions such as 'buy one get one free' incentivize consumers to choose their product over others.
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Customer Service: Enhanced after-sales service, warranties, and guarantees can provide a competitive edge by creating customer satisfaction and retention.
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Loyalty Schemes: Firms can implement loyalty programs to encourage repeat purchases, further solidifying their market position.
Thus, while price competition may be minimal, firms focus on maintaining and enhancing their market share through these means.
Step 2
Discuss the advantages and disadvantages of oligopoly as a market structure.
Answer
Oligopoly presents several advantages and disadvantages:
Advantages
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Stability in Prices: Price stability is common as firms avoid price wars, allowing consumers to plan their expenditures more effectively.
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Higher Quality Products: Firms in oligopolistic markets invest in R&D to improve product quality and customer service, benefitting consumers with better options.
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Secure Employment: Due to less intense competition, firms can offer more stable employment opportunities for their workforce.
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Informative Advertising: Advertising helps consumers become more informed about available products, leading to better purchasing decisions.
Disadvantages
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Higher Prices: Firms may engage in collusion or form cartels, which can lead to price increases detrimental to consumers.
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Supernormal Profits: High barriers to entry may prevent new competitors, sustaining supernormal profits that could stifle innovation.
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Restricted Choices: A limited number of firms can lead to restricted choices in the market, reducing consumer welfare.
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Risk of Collusion: Firms may agree on pricing or output, limiting market competition and leading to inefficiencies.
In summary, while oligopoly can lead to certain consumer benefits, the potential for market manipulation and reduced entry for new firms poses significant drawbacks.