Posted by Susan on .
What keeps oligopolies from becoming a monopoly? Why don't the firms join to dominate the market?
I know what oligopolies means:
There are three conditions in a oligolopolistic market place.
There has only a few large dominant firms.
Market has high barriers to entry.
Firms may produce products that are either defferantiated or homogeneous and firms tend to collude.
There are a number of explanations, and it depends on whether the goods are homogeneous or not. First, is that the firms overtly or covertly collude the set prices. Then, there is the dominant firm model, which says the dominant firm sets the proces and the other firms fal in line. There is the cournot model which suggest each firm tries to estimate what the other firms will do, and then based on this finding the firm produces to maximize its own profits.
This is probably oversimplistic -- but why should oligolopolistic firms merge if they're making a decent profit on their own?
Antitrust laws often keep such mergers from happening.
Further, if the firms are successfully colluding, then they are already maximizing combined profits; a monopoly gets them nothing.