Four-Firm Concentration Ratio Monopoly
Many people who are unfamiliar with the term fail to see the key market structures which are at the heart of Oligopoly. To them, it may appear a theoretical and abstract concept, but in actual fact, Oligopoly is based on many well-known market structures from other industries. An essential feature of oligopoly market examples is that there are monopoly prices. This is not a strange concept if one considers that Oligopoly is essentially a situation where two firms own a commodity, or service, or a group of products in a competitive situation. For instance, McDonald's, a large US company, has a monopoly over hamburgers. And the real estate industry, in which all large home builders have a monopoly over certain kinds of land and buildings, is an oligopoly market examples.
Now some might say that the monopoly price is a bad thing. Indeed it is, but this is not the whole story. A monopoly exists because of market power. Market power is when a firm has the ability to charge a price for a good or service above its costs of production. There are many economic theories that explain why large firms can afford to charge prices that appear to be exclusive of their fellow firms, but if you think in the terms of Oligopoly market examples this becomes obvious.
One important market structure that seems to underlie many of the above-oligopoly market examples structures is vertically integrated. In a nutshell, large firms utilize their scale of production and scale of distribution to control prices. The result is that large firms can effectively control not only the output but the inputs as well. If one thinks about the real world, Wal-Mart, 3M and other large firms effectively control much of the retail market for goods and services.
The result is that firms can set their own prices and even decide what kind of competition they don't want. The result is a situation where the largest firms can maintain monopoly power and have little incentive to reduce prices, or to open the market to new products and services. Another example of an out of control monopoly comes from the so-called vertical mergers, where two firms both contain significant elements of value. One firm takes over a business where there is a large current customer with significant competitive strength, while the other firm does the same with a less significant customer. Often a vertical merger is quite valued at the stock price. The problem is that the two rivals will not be able to work together to eliminate market power, and even if they could it would take years.
The result is that all too often firms who engage in these kinds of activity are able to successfully control the competitive environment, and maintain price distortions. In fact, it is these very same sorts of behaviour that led to the recent financial crisis. As a result, many economic textbooks have concluded that oligopoly competition, imperfect information and inefficient pricing are key reasons for the economic crisis. The problem is that many people do not understand the full extent of oligopoly market examples competition and its negative effects on prices and entry barriers.
For this reason, many people believe that there are other important factors involved in the recent crisis than mere price inflation and imperfect information. Rather they argue that crony capitalism, excessive regulation, and lack of productivity growth are the real problem behind the current crisis. However the solution to this problem is rather simple, and it involves only a simple increase in government spending and subsidies to boost competitiveness, correct shortages in skills and infrastructure, and correct corruption. A simple increase in overall economic freedom coupled with these four-pronged strategies will allow firms to work with a minimal amount of input costs, to avoid the high cost of market power rents, and to increase their total market power relative to firms that are not working within these parameters.
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