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¶ … oligopoly market are that there are few firms, the products have a low degree of differentiation and there are significant barriers to entry. Sakai and Yamato (1989) showed that there are a number of variables that influence the impact that oligopolies have on consumer welfare. These include the number of firms and the relative degree of differentiation. The most important variable, however, is information sharing. Private information sharing among firms in an oligopoly can shift the competitive dynamic towards a monopoly end of the oligopoly spectrum. In this scenario, consumer welfare would suffer. Barriers to entry/exit are another key variable, however. Barriers to entry harm consumers because they limit competition. Barriers to exit aid consumers because they commit the firms in the industry to finding ways to compete and drive market share gains. Overall, however, oligopoly is a less desirable state for the consumer than more open, broad-based competition.
In perfect competition, only normal profits are made in the long run and monopolistic competition trends towards a relatively equal distribution of income (Hartzenberg, 2005). This relationship implies that the further the market is from perfect competition, the further the distribution of income will be from equal. An oligopoly, therefore, will not deliver equal distribution of income.
In perfect competition, distribution of income is equal because all factors of production are earning their opportunity costs. An oligopoly sees adjustments to barriers to entry and exit, as well as a constriction of information. This reduces buyer power. If buyers have a lower degree of pricing power, the seller will take more of the income. Income distribution, therefore, is tilted in favor of the firms in the oligopoly.
Works Cited:
Sakai, Y. & Yamato, T. (1989). Oligopoly, information and welfare. Journal of Economics. Vol. 49, 1, 3-24.
Hartzenberg, T. (2005). Economics: Fresh perspectives. Cape Town: Pearson/Prentice Hall.
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