Question

Oligopoly normally tests the resolve among large firms or firms with only a small number of competitors who control all or significant portions of an industry. The dominant question is whether cooperation or short term profits should be more important? Explain why.

Answer 1

Answer

In an Oligopoly Market there are only a few large sellers and large number of buyers. Sellers have more bargaining power than consumers and sell somewhat differentiated products. Thus, the sellers can charge higher prices as compared to the prices charged in a perfectly competitive market.

The best strategy that should be followed by competitiors in an Oligopoly market is to cooperate and not look for short term profits. This is because with cooperation, these sellers can collectively charge higher prices and keep their businesses sustainable. However, if even one of them starts chrging lower prices to capture market, there would start a cold war amongst all the competitors and thus, everybody would try to keep the prices lower than the other. Thus would lead to losses for all the suppliers.

The best example can be the initial cold war between Telecom Companies in India, where Jio tried to earn short term profits by keeping the prices lower than other competitiors such as Airtel, Vodafone et. However, now even JIO realized that it is not a sustainable practice to keep the prices that ow and hence, all the oligopolists in this sector have collectively started to raise prices amd are cooperating.