Oligopoly
common technology standards (for high-definition television or DVDs, for instance) so as to promote overall market growth. Firms in the same market also might join in shared research and development programs. Coopetition also occurs when a company and its input supplier cooperate to streamline the supply chain, improve product quality, or lower product cost. In short, oligopoly analysis embraces both the threat of substitutes and the positive impacts of complementary activities. Finally, the potential bargaining power of buyers and suppliers should not be overlooked. For instance, the pricing behavior of a final goods manufacturer depends on the nature of the customers to whom it sells. At one extreme, its customers—say, a mass market of household consumers—may have little or no bargaining power. The manufacturer has full discretion to set its price as it wants (always taking into account, of course, overall product demand and the degree of competition from rival firms). At the other extreme, a large multinational corporate buyer will have considerable bargaining clout. Typically, such a buyer will have the power to negotiate the final terms of any contract (including price), and indeed it might hold the balance of power in the negotiation. (The producer might need the large buyer much more than the buyer needs the producer.) In the extreme, the buyer might organize a procurement and ask for competitive bids from would-be goods producers. In this way, the buyer uses its power to maximize competition among the producers so as to secure the best contract terms and price. (Negotiation and competitive bidding are the subjects of Chapters 15 and 16, respectively.) Of course, the same analysis applies to the firm’s relationships with its suppliers. We know from Chapter 7 that the firm will receive the best possible input prices if its suppliers compete in a perfectly competitive market. On the other hand, if the number of suppliers is limited or if actual inputs are in short supply, bargaining power shifts to the suppliers who are able to command higher prices.
Industry Concentration As noted earlier, an oligopoly is dominated by a small number of firms. This “small number” is not precisely defined, but it may be as small as two (a duopoly) or as many as eight to ten. One way to grasp the numbers issue is to appeal to the most widely used measure of market structure: the concentration ratio. The four-firm concentration ratio is the percentage of sales accounted for by the top four firms in a market or industry. (Eight-firm and twenty-firm ratios are defined analogously.) Concentration ratios can be computed from publicly available market-share information. Ratios also are compiled in the U.S. Census Bureau, released by the government at five-year intervals. Table 9.1 lists concentration ratios for selected goods and services compiled from both sources. Notice the progression from highly concentrated to less concentrated industries.
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