Explain why we can describe the toothpaste industry as oligopolistic.
http://www.cliffsnotes.com/more-subjects/economics/monopolistic-competition-and-oligopoly/conditions-for-an-oligopolistic-market
What do you think?
Why can we describe the toothpaste industry as a oligopoly
To understand why the toothpaste industry can be described as oligopolistic, we first need to understand what an oligopoly is. An oligopoly is a market structure in which a few large firms dominate the industry and have significant control over the market. These firms typically compete with one another but also have the ability to collude and act together to maintain their market power.
Now, let's explore why the toothpaste industry fits the characteristics of an oligopoly:
1. Few dominant firms: The toothpaste industry is predominantly controlled by a small number of large companies, such as Colgate-Palmolive, Procter & Gamble, and Unilever. These firms enjoy substantial market share and influence due to their brand recognition, distribution networks, and marketing efforts.
2. Barriers to entry: There are significant barriers for new companies to enter the toothpaste market. Established firms have established distribution channels, well-known brand names, and extensive research and development capabilities, making it challenging for new players to compete effectively. This lack of new entrants further solidifies the dominance of existing firms.
3. Interdependence: In an oligopoly, firms are highly interdependent. Actions taken by one firm have a direct impact on the others. Therefore, when one firm changes its pricing, marketing strategy, or introduces a new product, it can trigger a response from its competitors. This interdependence creates a situation where firms closely monitor each other's moves and often engage in strategic decision-making.
4. Non-price competition: In an oligopolistic market, competition extends beyond pricing. In the toothpaste industry, firms engage in extensive non-price competition through advertising, product differentiation, and packaging innovations. These efforts aim to create brand loyalty and capture a larger market share.
5. Collusion potential: Oligopolistic firms have the ability to collude and act together to limit competition and maintain their market power. Although collusion is illegal in many countries, firms may still engage in informal agreements or tacit collusion, where they monitor each other's actions and adjust their strategies accordingly.
To sum up, the toothpaste industry exhibits the key characteristics of an oligopoly, including a small number of dominant firms, barriers to entry, interdependence among firms, non-price competition, and potential for collusion. These factors contribute to the industry's description as oligopolistic.