Oligopoly

Oligopoly is a market structure dominated by few large firms with high market concentration ratio. The firms in the market produce differentiated products. In the UK , the  bus market operates in oligopoly market, the competition commision reported  that five largest bus operators , Arriva, Go-Ahead, Stagecoach , National Express and FirstGroup  carry the 70% of passengers. In airline industry, the firms tend to form mergers , to rip the benefits of monopoly profits, The Brittish airways was penalized 270mn as it admited collusion in fixing the prices , after it held illegal cartels with rival Virgin Atlantic.

In theory, there is high degree of interdependence between the rivals, and this causes them to take into account the counter actions of each other. This is emphasized in kinked demand curve, where the price rise above the market price by one firm results in elastic demand, as consumers will easily swith to substitues, in this case, othe rivals will not follow a price rise, and their total revenue will rise. If the firm decides to decrease its price below the market price, then other firms will follow in order to maintain their market share, this results in price war, and in long run all of the firms will lose out, as the final  price will be lower, and profits dramatically will fall. The fims therefore tend to form cartels where the firms produce seperately but sell at one agreed price, this form of collusion is illegal,  but it is relatively difficult to detect such collusions. The cartels are formed to earn abnormal profits where MC=MR, ( where the  each extra unit produced adds more revenue than cost) and restrict output…