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Oligopolies are firms that operate in a less competitive market where market concentration is high, meaning only few firms produce a given commodity and compete in a given market. Since each firm (oligopoly) has a large market share, they will choose a production level that makes their commodities cheaper relative to their competitors’, not at the optimal output level where marginal cost equal marginal revenue. In such, oligopolies have price competition rather than efficiency competition since they don’t have to be efficient to maximize revenues.
A monopoly is a firm that is the only producer (seller) of a good or a service where there is no close substitute for that product or service. Monopolies have a high level of market power, meaning they have power to control prices by controlling output level. The demand curve for monopolies has a downward slope, where prices affect quantities demanded. However, and since there are no close (or effective) substitutes under monopoly, the slope for the demand curve is inelastic. The term effective substitute means the feasibility of substituting one good for another. For example, wood and coal are substitutes for natural gas, but it is very unlikely for us to use them as substitutes for natural gas to heat our homes in urban areas.
In theory, both oligopolies and monopolies don’t have to produce at their optimal levels to maximize profits since they have the power to dictate the quantities produced (limiting supply), which affect the market prices they charge, and thus their revenues. In such, demand and supply don’t interact freely since supply in the cases of oligopoly and monopoly (more so for monopoly) is much more powerful than demand.
Discuss how the presence of firms with market power could reduce market efficiency? What negative consequences would this market condition have on consumers’ purchasing power? Could you think of a scenario where monopolies may be beneficial to the society?
Additionally, are antitrust laws necessary in a situation where two or more large firms with high market share decide to merge to increase efficiency (reducing production cost and/or increasing output level)?
Examples from the real world would be great and the world is full of them, be an adventurist…
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