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Oligopoly Agreement

For example, game theory may explain why oligopolies have difficulty maintaining collusive agreements to generate monopoly gains. While together, companies would be better off if they worked together, each company has a strong incentive to defraud and under-coerce competitors in order to increase their market share. Because the incentive to default is strong, companies cannot even enter into a collusive agreement if they do not perceive that there is a way to effectively punish defectors. You may be wondering why oligopolies remain stable without collapsing over time. For an oligopoly to be created and preserved, companies in a given sector must be able to recognize the higher profits they get from collusion, rather than competing. Vertical integration can “retain” the supply chain and complicate the lives of potential market players, such as . B of an electronics manufacturer like Sony with its own retail stores (Sony Centers). Vertical integration in the media sector is important: Netflix cleared ABQ studios based in the United States in 2018 and has reached an agreement in 2019 with the British studio group Pinewood, which gives it access to 14 sound scenes, workshops and offices. Many real oligopolies, marked by economic changes, legal and political pressures and the egos of their senior managers, are going through episodes of cooperation and competition. If the oligopolies could maintain cooperation between themselves in terms of production and pricing, they could reap profits as if they were a monopoly. However, each company in an oligopoly is encouraged to produce more and gain a greater share of the global market; When companies start to behave in this way, the market outcome may be similar, in terms of price and quantity, to that of a very competitive market. Oligopolies can be identified using concentration rates that measure the total market share controlled by a number of companies. If there is a high concentration in a sector, economists tend to identify the sector as an oligopoly.

The differentiation of products at the heart of monopolistic competition can also play a role in the creation of the oligopoly. For example, companies may have to reach a certain minimum size before they can spend enough on advertising and marketing to create a recognizable brand.