Hire a tutor

How can a business maintain market power in an oligopolistic market structure?

A business can maintain market power in an oligopolistic market structure through product differentiation, barriers to entry, and strategic pricing.

In an oligopolistic market, a few large firms dominate the industry, each holding a significant share of the market. These firms are interdependent, meaning the actions of one firm directly affect the others. Therefore, maintaining market power requires strategic planning and execution.

One of the key strategies is product differentiation. This involves creating a product that is perceived as unique or superior to those offered by competitors. This could be achieved through better design, higher quality, advanced technology, or superior customer service. By differentiating their product, a firm can create a unique selling proposition (USP) that sets it apart from its competitors. This can help the firm to maintain its market share and potentially attract new customers.

Another strategy is creating barriers to entry. This could be achieved through patents, high start-up costs, exclusive access to key suppliers or distribution channels, or regulatory approvals. By creating high barriers to entry, a firm can deter potential new entrants and maintain its market power. For example, a pharmaceutical company might invest heavily in research and development to create a new drug, and then patent it to prevent other firms from producing the same drug.

Strategic pricing is another important tool for maintaining market power. This could involve price leadership, where one firm sets the price and others follow, or price discrimination, where different prices are charged to different customers based on their willingness to pay. A firm might also use predatory pricing, where it temporarily lowers its prices to drive competitors out of the market, and then raises them again once it has increased its market share.

In addition, a firm can maintain its market power through mergers and acquisitions. By acquiring or merging with a competitor, a firm can increase its market share and reduce competition. This can also provide the firm with access to new technologies, markets, or resources, further strengthening its market position.

In conclusion, maintaining market power in an oligopolistic market structure requires a combination of product differentiation, barriers to entry, strategic pricing, and potentially mergers and acquisitions. By effectively implementing these strategies, a firm can maintain its market share and profitability in the face of competition.

Study and Practice for Free

Trusted by 100,000+ Students Worldwide

Achieve Top Grades in your Exams with our Free Resources.

Practice Questions, Study Notes, and Past Exam Papers for all Subjects!

Need help from an expert?

4.92/5 based on480 reviews

The world’s top online tutoring provider trusted by students, parents, and schools globally.

Related Economics a-level Answers

    Read All Answers
    Loading...