Oligopolistic Competition

Most industries are not entirely monopolistic; in fact, most are dominated by a few large firms. These markets lie somewhere in between the monopoly and the perfectly competitive free market; the most important type of these imperfectly competitive markets is the oligopoly.

In an oligopoly, two of the seven conditions are not present. Instead of many sellers, there are only a few significant ones. The share each firm holds may be somewhere between 25 percent and 90 percent of the market, and the firms controlling this share may range from 2 to 50 depending on the industry. Second, as with the monopoly, other sellers are not free to enter the market. Markets like this, which are dominated by four to eight firms, are highly concentrated

markets. A list of firms in oligopoly markets in the most highly concentrated American industries reads like a who's who of American corporate power.

The  most  common  cause  of  oligopolistic  market  structure  is  the  horizontal  merger  or unification of two companies that formerly competed in the same line of business. Because such markets are comprised of a small number of firms, it is easy for their managers to join forces to set prices and restrict their output, acting, in effect, like one large monopolistic firm. Therefore, like monopolies, they can fail to set just profits, respect basic economic freedoms, and protect social utility.

Oligopolistic competition

Oligopolies can set high prices through explicit agreements to restrain competition. The more highly concentrated the oligopoly, the easier it is to collude against the interests of society, economic freedom, and justice. The following list identifies practices that are clearly unethical:

1.   Tying Arrangements - when a company sells a buyer certain goods only on condition that the buyer also purchases other goods from the firm.

2.   Manipulation of Supply - when a company agrees to limit production.

3.   Exclusive  Dealing  Arrangements  -  when  a  company  sells  to  a  retailer  only  on condition that the retailer will not purchase products from other companies and/or will not sell outside a certain geographical area.

4.  Price Fixing - when companies agree to set prices artificially high.

5.   Retail Price Maintenance Agreements - when a company sells to a retailer only on condition that they agree to charge the same set retail prices.

6.   Price Discrimination - when a company charges different prices to different buyers for the same goods or services.

Several industrial and organizational factors lead companies to engage in these practices:

1.  Pricing Decisions - When organizations are decentralized so that pricing decisions are pushed down into the hands of a lower part of the organization, price fixing is more likely to happen. Price decisions should be made at higher organizational levels.

 2.  Job-Order  Nature  of  Business  -  If  orders  are  priced  individually  so  that  pricing decisions are made frequently and at low levels of the organization, collusion among low-level salespeople is more likely.

3.   Undifferentiated Products - When the product offered by each company in an industry is so similar to those of other companies that they must compete on price alone by continually reducing prices, salespeople come to feel that the only way to keep prices from collapsing is by getting together and fixing prices.

4.   Corporate Legal Staff - When legal departments fail to provide guidance to sales staff until after a problem has occurred, price-fixing problems are more likely.

5.   Personnel Practices - When managers are evaluated and rewarded solely or primarily on the basis of profits and volume so that bonuses, commissions, advancement, and other rewards are dependent on these objectives, they will come to believe that the company wants them to achieve these objectives regardless of the means.

6.  Crowded and Mature Market - When large numbers of new entrants or declining demand create overcapacity in a market, the resulting decline in revenues and profits creates pressures on middle-level managers. They may respond by allowing, encouraging, and even ordering their sales teams to engage in price fixing.

7.   Trade  Associations  -  Allowing  salespeople  to  meet  with  competitors  in  trade association meetings will encourage them to talk about pricing and to begin to engage in price-setting arrangements with their counterparts in competing firms.

8.   Culture of the Business - When an organization's salespeople feel that price fixing is a common practice and is desired, condoned, accepted, rationalized, and even encouraged by the organization, price fixing is more likely.

It is hard to legislate against many common oligopolistic price-setting practices, however, because they are proficient by tacit agreement. Firms may, without ever discussing it explicitly, realize that competition is not in their combined best interests. Therefore, they may recognize one firm as the "price leader," raising their prices in reaction when the leader decides to do so. No matter how prices are set, however, clearly social utility declines when prices are artificially raised.

Firms also infrequently resort to bribery, which also results in a decline in market competition. Bribes  serve  as  a  barrier  to  others  incoming  the  market;  the  briber  becomes,  in  effect,  a monopoly seller. To determine whether a payment is ethical, there are three relevant points to consider: