In oligopoly, each firm is acutely aware of the production and marketing decisions of all competitors and carefully considers the potential competitive reactions in all decisions. Discuss whether firms in other market structures consider the potential reaction of competitors when making important marketing decisions.
Other market structures do not consider the reaction of their competitors especially in a monopoly market structure. For such a market structure decisions are solely based on an enterprise’s independent decision since the firms in a monopoly structure are extremely independent of each other. In perfect competition markets there is a proliferation of many firms characterized by homogenous products. The occurrence of products of homogenous nature is indicative of the need to consider the views of other market competitors when making important decisions as this will affect the market share of ones products due to the tendency to switch to other alternative products. In a monopolistic competition market there is presence of various producers and consumers coupled with limited control of the market prices. This translates to the consideration of marketing decisions due to the high number of producers as the changes might affect competitive advantages of the company in relation to other firms.
Part of the debate among economists on US airline deregulation in the 1978 involved the theory of contestable markets. List the four characteristics of contestable markets and evaluate how well airline markets meet these criteria.
A contestable market is a market that exists in which new firms have access to most if not all of the production methods that are made available to the current firms and is not limited or forbidden from encroaching on the customers of the current firm while decisions are easily reversible without cost. Characteristics of such markets include low barriers to entry and exit i.e. there is ease through which new firms can enter the market. Contestable markets also have no sunk costs and the level of technology is accessible to all firms. Another characteristic of contestable markets is low consumer loyalty. Airline markets are not perfectly contestable as entry and exit is somehow limited to carrier hub costs. There are also sunk costs associated with advertisements for airlines. Vertical integration is also a hindrance to the free entry of firms.
Price outcomes of the 5 oligopoly models differ substantially. Which models produces the lowest and highest total profits (all firms combined)? What are the predicted prices? Provide aviation industry examples of routes or markets that might approximate each of these two outcomes.
Among the 5 models that exist for oligopoly firms the cournot solution seeks to maximize profits among all the firms provided through the assumption that the other firms output are fixed any changes brought about by one of the firms would lead to a change in the in the other firm too. Interdependency by each firm forces the profitability of all firms to help maximize yield and profits. The chamberlain theory insists on the indirect effect and direct effect on price. Mutual dependence was the key for this model and this is against the profit maximization goal of oliogopolists leading to the oligopolistic rationalization as a result of mutual dependence. Such dependence among firms has led to fluctuations where firm’s prices are changed from one price to the other
.Oligopoly is the predominant market structure in the airline industry. In the express package business, FedEx, UPS, and DHL compete in the global air express industry. In the US, FedEx and UPS are a duopoly. FedEx and UPS financial indicators such as net margin on sales and return on assets are near the average for US companies. What oligopoly model does this suggest and what characteristics of express package business would lead to this outcome.
The oligopoly model is Chamberlains duopoly as it considers the interdependence of firms in a market. The model is based on firm of relatively equal size with similar costs as is the case in the question. Firms in this market are well aware of the output or decisions based on price will lead to reactions from similar firms. Harmful competition in such an industry is averted through oligopolistic prices resulting in a stable industry equilibrium as is the case. Collusions are however not required in such markets.
Explain why the OPEC members often disagree on how much petroleum each country should produce.
OPEC countries often disagree on quantities of oil produced by member countries due to several factors that include the economic conditions to be met by oil producing countries in their countries i.e. the economic implications of under production. World markets are also volatile and not evenly spread thus stiff competition from non –OPEC members for market share or among OPEC member’s new entrants into the market have also brought forth the need to sell to an oversupplied market. Market share has also been a reason for constant disagreements among OPEC members with countries calling for a bigger market share in the world market through reviews.
