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Oligopoly Market Structure

An oligopoly market structure occurs where few large sellers (Pindyck & Rubinfeld, 2001 p. 446) dominate an industry. In the United States, there are few mobile manufacturing firms. The major firms include Nokia, Samsung, Motorola, LG, and Sony Erickson. Due to advancements in information technology, the need and use of mobile phones have increased tremendously. There is, therefore, an urgent need for the manufacture of additional mobile phone handsets. Europe has the largest number of mobile telephone subscribers in the world. Few large firms that provide the customers with handsets serve the market. These few firms dominate the market. These firms employ restrictive trade practices to entrants of other firms into the industry difficult. (Mingtao, 1973 p.42).

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The market share and the number of units produced by each firm have been summarized in the table below.

Firms Units produced Market Share
Nokia 115.4 million 40.1%
Samsung 46.3 million 16.1%
Motorola 27.4 million 9.5%
L G 24.4 million 8.5%
Sonny Erickson 22.3 million 7.8%

(Source: IDC, Strategy Analytics, ABI Research)

These firms employ trade practices such as mergers, collusion, and market share to control the market. They can raise the prices and restrict production as a monopoly does. Some companies are in the process of forming cartels so that they can be able to control a sizeable share of the market and dictate the prices of the handsets. These firms do not need to have a formal agreement for them to collude. They have recognized market leaders who set the market prices for the other firms to sell their handsets within a certain range. The European Union as a trading bloc constitutes a large and potential market. The firms collude to stabilize the market to reduce the risks that can be associated with investment and product development. Mobile phone technology is a relatively new invention (Mingtao Shi, 1973 p. 55).

Venturing into this business requires heavy capital investment and qualified labor in terms of technology (Colander, 2008, p. 127). This makes the entrance to this industry by small firms difficult. Use mobile phones are a recent development and a discovery in the world. It started in Europe and most of the companies that deal with mobile phones are located there. The mobile phone market in the European Union is an oligopoly market structure because the firms involved are price leaders and not price takers as in perfect competition (Mingtao, 1973 p. 61).

The entrance into this industry by a new firm is difficult as the already existing firms are well established and can be able to take the economies of scale to remove unstable firms out of the market. A perfect competition market, in reality, does not exist. It’s purely on assumptions. Taking into account the requirements of perfect competition, in reality, the assumptions cannot hold.

The forces of demand and supply cannot act freely without interferences resulting from other sectors and key players in the market such as government interferences and other unpredictable eventualities. The government must always interfere with the market structure since it has to control the operations of the firms to collect revenue as well as protect the consumers from exploitation by the firms. In the European Union mobile industry, the competition between the sellers is always fierce resulting in low prices with high production. This aspect has resulted in market perfections although the market cannot result in a competitive market structure. Since the firms are few, they try to outdo each other in terms of market command and the number of subscribers. They result in product differentiation whereby they try to give the customers a variety of commodities different from their competitors to diversify their products.

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Any new firm that wishes to join the market is through collaborated efforts by the existing firms rejected from the industry through price wars. The existing firms jointly lower the prices of their products such that the new firm is unable to sell its products. Being a new industry that requires patent rights protects heavy investments in terms of capital and human resources the existing firms and hence a new firm must acquire those rights to produce. The patent right holder has the discretion of refusing a firm to produce similar products and this has resulted in these firms acquiring oligopolistic status (Cohen, 1983 p. 218).

The law of demand and supply best explains the supply and demand economies. The law of demand states that as the price of commodity increases, the demand of that commodity falls and when the price of a commodity falls its demand increases. The law of supply states that as the price of a commodity rise, the supply of that commodity increases, and as the price fall, the supply of the commodity falls. Both the demand and the supply are a direct function of the price. Over the last year, the price of cars has greatly reduced. This is because the demand for cars has gone down while the supply has increased. Car manufacturing industries have increased in numbers. This has resorted to higher production of cars. As the theory of demand suggests if more of the quantity of a product supplied in the market exceeds the requirements of the market, the price of that commodity must go down (Vienneau, 2005 p. 614).

The graph below illustrates this scenario

Typical demand and supply curves.

The above diagram shows typical demand and supply curves.

When the prices of cars go down from p2 to p1 the quantity demanded increases. However, the quantity supplied can increase without a price change. This occurs due to changes in other factors that affect demand other than price. There has been a significant change in taste and preference in the car industry. With the invention of modern technology, people have changed their taste from manual-driven vehicles to automatic automobiles. This change has driven the producers to sell the old stock at low prices to clear the stock. Consequently, this shift in technology has facilitated the mass production of cars. Due to this, there are more cars on display than ever thus a reduction in their prices. Motor vehicle manufactures are on the rise. This has brought about a shift in the demand for cars from D1 to D2 as shown above. Within the last year, there has been an increase in a motor vehicles from the Asian continent. Countries like Japan China and Korea have significantly increased motor vehicle production to the extent that the market for cars has reduced (Barr, 2004 par. 3).

Low-cost vehicles exist to cater to low-income earners especially in less developed countries. This has significantly lowered the demand for cars. Due to many suppliers, the number of cars in the market has greatly increased. This intern has forced the prices to fall over the last year and the demand for cars has increased. Within the last year, the economy has been in a recession. The buying power of the people has been very low. This has resulted in a very low demand for cars worldwide. The manufacturers and car dealers have to lower the prices to attract customers. With the recession, most of the income that various households spend on such necessities as food, housing, and clothing has increased with very little investment. This, in turn, lowered the peoples’ ability to save and hence cars were a priority rather than necessity. This led to low demand for the cars and hence a reduction in their prices. With the recession, the cost of necessities increased (Opocher & Seedman, 2009 pp. 937-948).

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The price for goods and services almost doubled, the cost of labor increased and hence many people were rendered jobless simply because the level of the economic activity had gone down. People had very little or no money to spend and thus the demand for the vehicles had gone down significantly. On the other hand, the price of cars has changed recently with the growth of the economy. As the economy gets out of the recession, the demand for cars continues to increase and hence the increase in the price. The change in price for the cars is attributable to a combination of factors such as the price, change in technology, demand, and the level of economic activities (Barr 2004, p.48).

Reference List

Barr, N., 2004, Economics of the welfare state. New York: Oxford University Press Cohen, J. 1983 “‘The Laws of Returns Under Competitive Conditions’: Progress in Microeconomics Eastern Economic Journal, V. 9, No.3, pp. 213-220.

Colander, D. C., 2008, Microeconomics (7th Ed). New York: McGraw-Hill.

Fluhr, Z. & Nussbaum, E. (1973). Switching Plan for a Cellular Mobile Telephone System. IEEE Transactions on Communications, Vol. 22, No 4, pp. 197- 202.

Mingtao, S. (1973). Technology base of mobile cellular operators in Germany and China, Opocher, A, & Seedman, I. (2009). Input price-input quantity relations and the numeraire. Cambridge Journal of Economics, Vol. 33, No. 5

Pindyck, R, & Rubinfeld, D., 2001, Microeconomics (5th Ed.). Prentice-Hall 2001.

Stiglitz, J., 2000, Economics of the Public Sector. New York: W. W. Norton & Co Vienneau, R. L. (2005). “On Labour Demand and Equilibria of the Firm“, The Manchester School, Vol. 73, No. 5, pp. 612-619.

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