Theory of Oligopoly Essay

It is quite evident to note that the theory of oligopoly is a prevalent and fundamental principle in the economic facet. From the laws that the theory holds most dear to the way, it stipulates stuff ought to be undertaken to maximize profits of any given business in a given market niche. Therefore, the theory of oligopoly seeks to do a reconciliation of the same in a way that it will achieve the desired targets in the field of economics. The fact that some extent of cooperation is pretty essential in some firms as compared to others, but the bottom-line remains that scenarios matter the most.

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Moreover, a collusive agreement has a couple of challenges that spirals to a problem in theory. Though there is an important series of implications that the theory experiences. To substantiate this claim, there are several empirical pieces of evidence. On the collusion issue, the theory of oligopoly does not satisfactorily start with assumptions on perceptions of the interdependence of a single firm vis a vis other firms. Therefore, the individual firm behavior is critical to the desire of profit maximization. Taking into consideration the forces of demand and supply, the firms seize the moments in the industry and conspire to gain maximum profits. In this scenario, it means that for both firms that exist in a given market niche offering similar and substitute product, to attain maximum benefits acting together as a monopoly is vital. That aside, there are a couple of factors that make the cooperation of firms to be feasible hence attain the core goal; profit maximization. The entire process of a conspiracy of firms is just a step higher than only the apparent consideration of price. At first, the products ought to be homogenous. The attribute of product homogeneity is responsible for enhancing active collusion since substitution of the products is infinite. Therefore, the decisions made by buyers of the products play a critical role in the whole process of making oligopolistic firms to be at equilibrium. The behavior of one firm always results to some adjustment by the rival firm to keep the competition ripe. The purchase commitments by buyers and the products on offer from the side of sellers are responsible for enhancing useful homogeneity.

Besides that, there is a difference amongst buyers. The difference is usually as a result of the volume of purchase and the urgency of the bargain. Also, there are various methods of collusion of firms. Leading the pathway is the merger. The problem with the merger is that it will face diseconomies of scale. Also on other jurisdictions, a merger can be forbidden by law in a quest to protect the exploitation of citizens. At often does the colluding firms agree on the structure of the price on which they will resolve to apply in their price mechanism. The price structure is very critical in attaining a maximum profit (Stigler). For instance, in cooperation, a maximum benefit is set and tracked over time to enhance competitiveness whereas adjusting the deviations to make the whole mechanism applicable.

Moreover, in the collusion sellers are not bound to experience the same control of the market share. The claim is valid because sellers behave differently in spite of the homogeneity of products. One firm's customers may grow significantly while the rival's customers may decline depending on other factors. For example, customers may have some uncorrelated demand fluctuations which will affect the seller's output measures and strategies in the short run. Another serious consideration is the policing of a price agreement which must involve a regular audit of the transactional prices. The theory of oligopoly stipulates that for perfect collusion the buyer ought to change the sellers voluntarily without coercion or undue advantage. The sellers must also put a given set of incentives to lure the buyers, and this will create a competitive market with perfect collusion.

Reference

Stigler, G. (2010). Theory of Oligopoly. CPI Journal, 6.