How far does the theory of oligopoly match with the reality?
In studying market structures one of the most commonly used case study examples explore oligopolies; the reason is because they are so predominant in modern business.
Oligopolies refer to a market structure where an industry is dominated by a small number of large sellers It follows that these sellers are also dominant buyers (of stocks and employment of resources) in the industry too - this is termed oligopsony.
The aim of this activity is to investigate some examples of oligopolistic markets and to draw some conclusions about how accurate the theory of oligopoly is in reality.
The following are all good examples of industries that have an oligopolistic market structure:
Groceries - dominated in the UK by Asda/Wal Mart, Tesco, Sainsbury and Safeway/Morrisons
Chemicals/oils - wide definition of the term ‘chemical’ but key players are Shell, Exxon, GlaxoSmith Klein, ICI, Kodak, Astra-Zeneca, BP, DuPont, BASF and Bayer
Brewers - Interbrew, Scottish and Newcastle, Guinness, and Carlsberg Tetley have a four firm concentration ratio of 85%!
There are of course plenty of others but this gives an idea of the extent to which industries are moving towards oligopolistic structures. It is clear as well that many firms are so large that they have significant interests in a variety of markets - each of which may be oligopolistic in nature. Sony for example, not only manufactures electrical goods of all types but have interests in entertainment with the Sony record label.
Choose one of the above markets and research the following aspects:
What is the concentration ratio of the industry?
Is there any evidence of collusion in the industry?
Is there a price leader in the market?
Is there evidence that abnormal profits exist in the industry?
What barriers to entry can you identify in the industry?
What evidence of interdependence exists in the industry?
Having collated the information above (some of which will be easier to find than others) present a report of 1000 words or a poster on the nature of oligopoly and the extent to which the industry you have chosen reflects the theory of oligopolistic market structures.
Useful sources of research:
www.oligopolywatch.com - useful independent site with discussions and case studies about the nature of oligopoly
http://www.competition-commission.org.uk/our_role/consultations/past/pdf/ebmarket.pdf - see page 40 for a discussion on the nature of oligopolies. The Competition Commission Web site will invariably lead you to issues relating to a wide variety of industries - for example the mobile phone industry.
http://www.oft.gov.uk/About/default.htm - search the site by putting in ‘oligopoly’ the report on the wholesale supply of compact discs is illuminating. Other sources have a theoretical explanation of oligopoly with some case studies at the end of the document. (See merger appraisal in oligopoly markets)
http://www.guardian.co.uk/business/story/0,3604,899174,00.html - Guardian story on price fixing in the toy market
http://www.guardian.co.uk/business/story/0,3604,295228,00.html - price fixing in vitamins industry (section of the chemical industry)
http://football.guardian.co.uk/News_Story/0,1563,1010631,00.html - football kits! Need we say more?
http://www.guardian.co.uk/business/story/0,3604,506029,00.html - Abnormal profits in the banking industry
http://news.bbc.co.uk/1/hi/business/1726850.stm - BBC news story on the brewing industry
http://news.bbc.co.uk/1/hi/business/1775384.stm - the motor vehicle sales and repair industry
http://news.bbc.co.uk/1/hi/special_report/1999/02/99/e-cyclopedia/1270397.stm - - guide to the key issues in the grocery industry in the UK
http://news.bbc.co.uk/1/hi/business/797558.stm - article on the merger of AOL and Time-Warner
5 marks - AO1 Demonstrate knowledge and understanding of the specified subject content
5 marks - AO2 Apply knowledge and understanding using appropriate terms, concepts, theories and methods effectively to address problems and issues
10 marks - AO3 Select, organise and interpret information from various sources to analyse problems and issues
10 marks - AO4 Evaluate evidence, make reasoned judgements and present conclusions accurately and appropriately
Total 30 marks