Oligopoly and Market Dynamics: A Detailed Analysis
Oligopoly: Definition and Characteristics
An oligopoly is a market or industry dominated by a small number of sellers or producers. Because there are few participants, each oligopolistic firm is acutely aware of the actions of the others. The decisions of one firm significantly affect or influence the decisions of others. By exerting market power, they cause higher prices and reduced production. These companies maintain that power, partly by avoiding intense competition.
Types of Oligopoly Behavior
Non-Leader Oligopoly
In a non-leader oligopoly, several companies exist, but none has a dominant market share. There is a constant struggle between them to capture a larger portion of the market. Firms continuously make strategic decisions, considering the strengths and weaknesses of each competitor’s business structure.
Leader-Follower Oligopoly
A common scenario is where one company acts as a leader and the others are followers. Instead of a simultaneous equilibrium, the leader (possessing a significant business advantage) makes the first move, to which the followers then react. The leader anticipates the followers’ responses and adjusts its decisions accordingly, as if controlling them for its benefit.
Collusion
Collusion occurs when oligopolistic firms agree to act in concert when offering their goods and setting prices. This coordination aims to achieve greater total profit for each firm than if they acted separately, sometimes leading to a situation similar to a monopoly from the consumers’ perspective. Collusion is generally prohibited in many countries, such as Spain.
Market for Goods and Services
Operation
The supply and demand for a product determine an equilibrium price. At this price, companies freely choose how much to produce. The market determines the price, and each company accepts this price as a fixed datum over which it has no influence.
Production of Each Company
Based on the equilibrium price, each firm will produce the quantity indicated by its supply curve at that particular price. Each firm’s supply curve is determined by its production costs.
Minimization of Costs and Benefit Equalization
At the equilibrium price determined in a competitive market, firms will not, generally, have the same profits. This is because, even assuming all firms know the same technology, the fixed installations of each company differ in the short term, leading to variations in costs and profits. While this situation may exist in the short term, it will not persist as organizations restructure their production processes. Moreover, the profits obtained by the most efficient companies will attract firms from other markets or sectors. Again, in the short term, they may not be able to leave their current sector, but as soon as they can liquidate their facilities, they will. Thus, in a perfectly competitive market, there is a tendency towards minimizing costs and equalizing benefits.
Labor Market
Definition and Characteristics
The labor market is where the demand and supply of labor meet. It has unique features that differentiate it from other markets (financial, real estate, commodities, etc.) because it relates to the freedom of workers and the need to ensure that freedom. The labor market is often influenced and regulated by the state through labor laws and collective bargaining agreements.
Demand for Labor
Demand for labor represents the number of workers that companies or employers are willing to hire. Companies need workers to carry out their business operations and maximize profit through the sale of goods and services produced.
Labor Supply
Labor supply is the number of workers who are willing to offer their services to employers. *It has a positive slope because as wages increase, workers are more willing to forgo leisure for work.*