An oligopoly is a market structure dominated by relatively small number of mutually interdependent firms producing homogenous (pure oligopoly) or differentiated (differentiated oligopoly) products (Keat et al, 2014). An oligopolistic market exhibits features which include a few sellers of a product, barriers to resource mobility, non-price competition and interdependency among firms. Sources of an oligopoly consist of economies of scale, control of a major raw material in the industry, patented production processes and government franchise among others. The North American Automobile industry operates as an oligopoly. In the early 1900s the industry was dominated by three major producers namely General Motors, Ford and Chrysler. Even with the …show more content…
This means that firms take into consideration the likely reactions of their rivals to any change in price, output or forms of non-price competition. General Motors, Ford, Chrysler, and Toyota during the financial crisis, were charging relatively identical prices for similar cars because each of them anticipated that the other may reduce prices to increase market share. Moreover, with this interdependence comes uncertainty. Firms in this industry cannot easily ascertain the marginal revenue to determine price as in the case of other market structures. Firms are usually uncertain on what price to charge since higher prices will reduce demand if other firms do not follow whilst lower prices might start a price war with the other firms (as proposed by Paul Sweezy in the Kinked Demand Theory). Due to this, each firm must take into account how competitors will react to its profit maximizing output decision. These firms therefore, exhibit interdependent decision making which may lead to intense competition among the few firms (Mankiw, …show more content…
In response, General Motors acquired 20% shares in Suzuki-the then famous motorcycle company. Ford followed suit by partnering with Harley- Davidson to produce motorcycles. Bargaining power of both suppliers and buyers can influence the profit maximisation of an oligopolist. Individual buyers may not wield much power although they are price sensitive but corporate buyers and dealers-buyers may wield power since they buy in large quantities. Ford introduced the Ford motor-credit for dealers to buy on credit. General Motors, Chrysler and Toyota have all followed