What are Oligopolies?
Oligopolies are market structures characterised by a small number of large firms dominating the market. These firms have significant market power, which allows them to influence prices and output levels. As a result, oligopolies often have the potential to earn supernormal profits, especially in the short run.
Several factors contribute to the ability of oligopolies to make supernormal profits:
1. Barriers to entry: Oligopolies often have high barriers to entry, such as high capital requirements, economies of scale, or control over essential resources. These barriers limit the number of firms that can enter the market, allowing existing firms to maintain their market power and profit levels.
2. Price rigidity: Firms in an oligopoly may engage in price rigidity, meaning they are hesitant to change prices in response to changes in demand or cost conditions (sticky prices). This can lead to prices being maintained above the competitive level, allowing firms to generate supernormal profits.
3. Collusion: Sometimes, firms in an oligopoly may engage in collusion, either overtly or tacitly, to coordinate their pricing and output decisions. By acting together, they can effectively reduce competition and maintain higher prices, resulting in supernormal profits.
4. Product differentiation: Oligopolistic firms often differentiate their products through branding, advertising, and other marketing strategies. By creating the perception of uniqueness, they can charge higher prices and potentially earn supernormal profits.
However, it's important to note that the presence of supernormal profits in an oligopoly can vary depending on market conditions, competition, and government regulations. In the long run, the potential for supernormal profits may attract new firms to enter the market or prompt existing firms to innovate, which can increase competition and eventually erode supernormal profits.
Several factors contribute to the ability of oligopolies to make supernormal profits:
1. Barriers to entry: Oligopolies often have high barriers to entry, such as high capital requirements, economies of scale, or control over essential resources. These barriers limit the number of firms that can enter the market, allowing existing firms to maintain their market power and profit levels.
2. Price rigidity: Firms in an oligopoly may engage in price rigidity, meaning they are hesitant to change prices in response to changes in demand or cost conditions (sticky prices). This can lead to prices being maintained above the competitive level, allowing firms to generate supernormal profits.
3. Collusion: Sometimes, firms in an oligopoly may engage in collusion, either overtly or tacitly, to coordinate their pricing and output decisions. By acting together, they can effectively reduce competition and maintain higher prices, resulting in supernormal profits.
4. Product differentiation: Oligopolistic firms often differentiate their products through branding, advertising, and other marketing strategies. By creating the perception of uniqueness, they can charge higher prices and potentially earn supernormal profits.
However, it's important to note that the presence of supernormal profits in an oligopoly can vary depending on market conditions, competition, and government regulations. In the long run, the potential for supernormal profits may attract new firms to enter the market or prompt existing firms to innovate, which can increase competition and eventually erode supernormal profits.
Supernormal Profit in an Oligopoly Market
Profit maximisation output in an oligopoly market.
