Hi guys, i got very confused by the answer of this question from official curriculum:
Q: Over time, the market share of the dominant company in an oligopolistic market will most likely :
A. increase
B. decrease
C. remain the same
Answer: B
My thoughts : in an oligopolistic market, the dominant company’s market share will INCREASE as price war between other companies ruling out some small players. But the answer from curriculum says market share of the dominant company will DECREASE as profits attract new entries. To me, it is only a short-term thing that market share of the dominant decrease, on long-run, the market will reorganise as the dominant reduce price and rule out the small players so as to take back its market share. So the correct answer for me is A or C (if two effects offset each other).
The most-dominant firm also has biggest target on its back because it is earning the most profits. Bank robbers rob banks because that’s where the money is, and new companies go after fat & happy incumbents in an oligopoly or monopoly market because that is where the market share and profit are.
Unless there are significant barriers to entry, then most likely over time that competitive advantage will erode as new entrants come in and compete for and get some of those outsized returns and market share. Over time that oligopoly will deflate into something closer to Perfect Competition where there are no outsized returns. Total number of firms in a perfectly competitive market are > than # of firms in an Oligopoly, and likewise, market share of individual firms in a competitive market is < market share of Oligopoly companies.
Your scenario might hold true in a market where there are significant barriers to entry, such as in a highly regulated industry. (eg, a public utility or space travel). But absent significant barriers to entry, then over time the market will get more and more competitive and whatever edge that powerful incumbent had, will erode and with it, market share and profits.
If it’s a true oligopoly, the likelihood of new entrants is very low because the barriers to entry are very high. Moreover, compariing an oligopoly with ‘perfect competition’ is a non-starter. You’re comparing chicken salad with chicken feed: thye have nothing in common.
That is because the only way to compete in a ‘perfect competition’ is on price. In contrast, any oligpolist in good standing knows that the first three rules of competition in an oligopoly are never, never, NEVER compete on the basis of price. Doing so is a race to the bottom of the ocean–and the divers are wearing cement wet-suits.
You’re missing the key words in the question, “over time” and “most likely”. Over time oligopolies tend to deflate into something closer to perfect competition, hence why answer B is correct here.
Think of examples. I can only use my own country as brand names but here we go.
Razor blades - for many years market dominated by Gilette and Wilkinson. A basic duopoly. Prices were high, minimal innovation in new products kept bringing higher prices. They had strong distribution into supermarkets and drug stores. New entrants were cropping up all the time (check out Harry’s razors) - helped iin recent years by internet delivery - breaking into the market. More choice, slowly more playes profits are erroding for existing companies.
Larrge brewers (beer companies) dominated market for supply of beer, both in pubs and supermarkets. Innovation and quality low. New smaller “micro-brweries” have entered the market - often charging more for better product - and the existing brewers are losing share.
Profits will always attract new entrants who will try new business models.
Even markets where it is hard to break in, gaming consoles, you have companies tryign to enter the market. XBOX entered a duopology of playstation and nintendo. Nintendo finished off Atari.