Oligopolies have increasingly played a key role in the modern business environment. Monopolies have contributed to the oligopolistic pursuits by these firms and they affect the economy in various ways. It is important to define monopolies and oligopolies in order to understand the distinction between the two. A monopoly is a market which is characterised by the ability of the existing firms to control the services or goods which are provided, and decide who to give access to. Monopolies thus feature a lack of substitute for the products in the market and a lack of competition in the market.
Most governments restrict monopolies due to the negative effects associated with them. On the other hand, oligopolies are markets or industries which have fewer sellers who influence each other to control the market (Lancaster and Withey 2006: 140-145). In this type of market, there are few sellers who monitor the actions of others, and this influences the decisions which they make. The decisions of one firm are therefore influenced, and influence decisions made by other firms. Weaknesses of monopolistic firms.
However, as previously mentioned, monopolistic firms are deemed to have certain weaknesses, which necessitates their control by most governments. The major weakness of these types of firms arises from their ability to control the market. Due to this ability, they can exploit the market in order to boost their profits. Since the monopoly market features no substitutes for these products, then the consumers have to buy the products at the available price, since they do not have any other option, especially if the product is a necessity. This ends up exploiting the market for the gain by monopolies.
According to Sloman (2006: 168-172), another weakness of monopolies is that there is a high possibility of reduction in the quality of the products produced due to the lack of competition. Monopolies feature no competition, a fact which makes them lower the quality of products through purchase of cheap inputs, in order to reduce the production costs, so that they may boost profits. The cheap inputs affect the quality of the product, and since there is no competition, monopolies are sure that consumers will buy these low quality products.
The third weakness which is attributable to monopolies is the reduction in satisfaction by consumers, and this is caused by a limited variety of choices to make (Wessels 2006: 470-473). Consumers are forced to purchase the goods offered by monopolies, in spite of their weaknesses, since they do not have other options to take. According to Reddick and Coggburn (2008: 270-274), the consumers have also limited options to make in terms of price, quality, brand, size and other attributes which increase the utility of the consumer.
The utility derived from the goods or services which are consumed is lower due to absence of choices to make. The fourth weakness attributed to monopolies is the increase in price. As was earlier explained, monopolies have control over the market and decide the prices to be charged. There is a high possibility that such firms will increase the prices which they charge consumers, in order to maximize their prices. Finally, monopolies face the possibility of remunerating employees poorly and creating a poor work environment, since there are no related firms which employees may seek alternative employment.
This is a situation which mostly happens in cases the industry is unique, like for instance a power or nuclear plant. Employees who work in such industries, if it is a monopoly, have very low possibilities of finding a similar job if they leave their current employer. This makes such employers exploit employees with the knowledge that they cannot go to competitors. Benefits of oligopolies to the economy. In an oligopoly market, the same weaknesses inherent in monopolies are featured, since the firms which are available share information, which makes it relatively easy for them to exploit consumers.
If one firm raises its prices, the rest follow the decision and raise their prices, leaving the consumer with no choice but to purchase the products at lower costs. There are however some benefits which may be associated with an oligopolistic market, and these arise as a result of having few sellers, which makes a consumer have more than one option to choose from. The presence of more than one seller implies that there will be competition between the firms, and this is likely to generate various benefits to the market.
The role of oligopolistic firms in relation to the innovation of the economy and the increase in efficiency is thus analysed below. Lower prices. One benefit which oligopolies provide to the market is a lower cost of the products. This arises out of the fact that there is competition in the market, and that the existing firms influence each other’s decision. The fact that oligopolies compete against each other is likely to ensure that prices charged to the market are lower than those of a firm’s competitors. This is because consumers go for products which cost the least price, when all other factors are held constant.
The fact that the existing firms share information and influence the decisions which are made by each other, means that if one competitor lowers the prices, the rest will also follow in order to maintain the present customers. On the other hand, if one firm raises its prices, the other firms may not follow suit, which will make the firms with the high prices less attractive to consumers. This is a situation which discourages oligopolistic firms from raising their prices, which is beneficial to consumers. Higher quality products.
As has been explained in the above point, oligopolistic markets feature relatively lower prices due to the presence for competitors who want to attract consumers. In order for such firms to maintain the lower prices but still make profits for the products sold, it is necessary to reduce the production cost of these products. According to Weaver (2006: 66-72), the production cost is primarily reduced by increasing efficiency in production and this has the effect of making the economy produce the maximum goods and services at least cost.
This is very important in economic growth of an economy since it significantly increases the GDP in such economies. Innovation. Monopolistic firms deal with similar products, which makes competition between the firms in this market relatively challenging. These firms are used to use various strategies in order to gain an advantage over their competitors. One of the most common strategy used by these firms is innovation. This is a strategy which involves creating products which had either been ignored or were unknown, which satisfy the market needs.
Innovation helps firms to have an edge over competitors through satisfaction of the neglected market needs, and this in turn attracts consumers to such firms. For instance, one form of innovation which is also common in oligopolistic markets is product differentiation. It involves the changing of products in order to make them different from those of the competitors. According to Worthington (2006: 344-349), product differentiation plays a key role in oligopolies since all firms charge prices which are above equilibrium, which leaves this as one of the few strategies that such firms can use to maintain competitive advantage.
Innovation is very important in an economy of any country, since it not only increases sales of existing firms but it also increases efficiency and reduces costs of these firms. This is important in the growth of the GDP in any economy. Research and development. According to Case and Fair (2006: 30-38), since oligopolistic markers feature fewer sellers in the market, they enjoy excess profits which are attributed to the economies of scale, lower costs and other benefits which these firms enjoy. As a result of the excess profits, these firms invest a lot of funds in research and development.
Research and development is very crucial for the economic growth and development of any country. This is especially crucial in certain sectors such as the pharmaceutical industry, where development of a new drug costs millions of dollars. Smaller firms cannot afford this amount of money, which leaves oligopolies to serve this purpose. This enables economies to grow at a faster rate due to the presence of oligopolistic firms. Discussion. Oligopolies can be seen to play an essential role in the economy of a country since they facilitate an increase in efficiency, improvement in quality of products, innovation and research and development.
For an economy to grow, these four inputs must be present. According to Ajami et. al. (2006: 50-54), trade is a major source of revenue for any country and for products to be competitive in a global market, they have to be of high quality. High quality products can only be realised through increased efficiency, research and development as well as innovation. Oligopolies should therefore be encouraged in different economies to promote economic growth. Oligopolies do not also exploit consumers due to the inherent competition between the various players in the industry.
The presence of more than one player in the market presents an opportunity for consumers to seek alternative choices in case they feel exploited by a certain firm. The innovation presents then with an opportunity to maximise their utility through having a variety of choice. Summary and conclusion. Oligopolies have certain features which present benefits to both consumers and the economy at large. It presents consumers with the ability to make choices on the products to consume and prices to pay. If consumers find that prices of certain firms are too expensive, they have other firms’ products to choose from.
The innovation attributable to oligopolies also presents consumers with a variety of products to choose from. The economy benefits from increase in efficiency, improvement in quality of products, innovation and research and development. It is the duty of the government to encourage the formation of oligopolies to attain economic growth and development. There should however be minimal regulation to prevent collaboration between oligopolistic firms to exploit the market. Bibliography. Ajami, R. A. , Cool, K. , Goddard, J. , Khambata, D. 2006. International Business: Theory and Practice. Washington: M. E. Sharpe.
Case, K. E. , Fair, R. C. 2006. Principles of Economics. Washington: Pearson Prentice Hall. Lancaster, G. , Withey, F. 2006. Marketing Fundamentals: 2006-2007. California: Butterworth-Heinemann. Reddick, C. G. , Coggburn, J. D. 2008. Handbook of Employee Benefits and Administration. Washington: CRC Press. Sloman, J. 2006. Economics. New York: Financial Times Prentice Hall. Weaver, F. S. 2006. Economic Literacy: Basic Economics with an Attitude. Atlanta: Rowman & Littlefield. Wessels, W. J. 2006. Economics. New York: Barron’s Educational Series. Worthington, I. 2006. The Business Environment. London: Cambridge Press.
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