Companys strategic behavior in terms of oligopoly

 

Content

 

INTRODUCTION 3

PART I. THEORETICAL BASES OF RESEARCHING OF STRATEGIC BEHAVIOR 5

1.1 Types of markets: definition and principles of functioning 5

1.2 Models of company’s strategic behavior on the oligopoly market 12

PART II.  COMPANY’S STRATEGIC BEHAVIOR IN TERMS OF OLIGOPOLY IN UKRAINE 20

2.1 Peculiarity of company’s strategic behavior on Ukrainian mobile-communication market 20

2.2 Evaluation the company’s behavior in the air transportation 22

2.3 Problems, that appears in national companies on the oligopoly market……......23

2.4 The ways of improvement the national company’s strategic behavior on oligopoly market…………………………………………………………………....26

CONCLUSION 29

THE LIST OF RECOMMENDED LITERATURE 31

 

 

 

Introduction

 

Current economic situation is a combination of different forms of relations between economic actors. Certainly the key relationship in the system is market relations. Market relations, as a set of commodity-money relations between seller and buyer, are a broad economic category. The type of market structure depends very much. In today's world, among the four market structures are only two real: oligopoly and monopolistic competition. Deserve the most attention is oligopoly markets, because large corporations, which operate on oligopoly markets determine economic conditions and economic development trend of various countries and international economic relations, which is especially important in crisis changes vector relationships. Therein lays the relevance of this work.

The objective is to conduct research firm’s strategy on oligopoly markets.

For the purpose of work, was formed several tasks:

1. To explore the theoretical aspects of oligopoly, such as market structure
2. Identify the types of oligopoly models, noted the key differences and similarities in the strategies of firms in these or other models
3. Analyze the current state of some oligopoly markets in Ukraine, to determine the causes and consequences of such conditions.

The research object is the structure oligopoly markets, and particularly their function in modern terms.

The subject of research is the strategic behavior of firms on oligopoly markets, and problems arising in markets with oligopoly structure.

This issue is widely reported in the literature. Among the authors of Foreign note the following: Busyhyna V.P., Zhelobodko E.V., Kokovyna S.G., Tsyplakova A.A., Aumana R., J. Nash, M. Porter, P. Krugman. Among Ukrainian scientists are engaged in this issue: Hrontkovska G.E., Filyuk G.M., Ohlih V.V., Shapovalov A.A., Oleinik O.V.

Scientific novelty and contribution are: the theoretical generalization of existing structural hierarchy of types and models of market structures; in research and theoretical and applied analysis of processes on individual markets oligopoly Ukraine.

 

PART I. Theoretical bases of researching of strategic behavior

1. Types of markets: definition and principles of functioning

 

In the process of historical development of society, manifested a great diversity of markets and methods of their classification. One, of the more general classifications of markets - the type of market structure, that is the nature of interaction between entities in a particular industry. The current scheme of two-types of market structures. The first phase of the division of the "pure competition" for perfect and imperfect, and the second - according to the peculiarities of behavior in imperfect competition, according to monopolistic competition, monopoly and oligopolies. The criteria for classification are:

1. number of sellers and their market shares
2. level of product differentiation
3. conditions of entry and exit from the field
4. producers’ level of control over prices

nature of the behavior of firms. [1, p.145]

Depending on the content of each combination of features and forming

different types of industry markets, characterized by varying degrees of competition.

Now more about each type.

Perfect competition. To clear the market (perfect) competition, these signs are:

1. A lot of sellers who compete on equal terms with each other. The term "lot" has no quantitative terms, there may be thousands, tens or even hundreds of thousands. The main thing is that the each share in the market was so small that the increase or decrease in sales of any of them will not reflect on the general market situation. Of course, such conditions are rare. However, certain conventionality of this attribute corresponds to agricultural markets in developed countries, the stock trades or sales of foreign currency in exchange. [2, p.120].
2. Standard products offered for sale. This means that the consumer does not distinguish the goods of one seller from the goods of another, even if they have differences. So it equal, the product of whose seller you will buy.
3. Absence of possibility for a separate salesman to influence on a market price. A salesman can offer the products on lower prices comparatively with those which were folded at the market. However it, at first, not will influence on a market price in general, as part of separate salesman at the market is wretched, but secondly, will conflict with original assumption about maximization of benefit as basic reason of behavior of economic subjects, in fact in this case the income of salesman will diminish comparatively with a sale at market price. There is not other choice for him, how to sell a commodity on market prices. Therefore a salesman in the conditions of perfect competition is mostly named "that, who accedes to the price".
4. Free entrance and exit from industry. A market will be a competition only then, when no legislative, technological, financial or other barriers, which would prevent to appearance or disappearance of new firms which produce a certain product, will be. It follows to mark on this feature of perfect competition, as exactly on its explanation of mechanism of adaptation of industry is based to the requirements of market in a long-term period. [3, p.354][4, p.95]

In the conditions of pure competition, as marked already, a firm can not pursue an own price policy. She can, only to adapt to those prices which on this time was folded at the market. Thus, it is possible to do a very important conclusion: how many products a competition firm would not offer for a sale, it in any way will not influence on a market price. Otherwise speaking, unlike market demand a demand curve which a separate competition producer runs into is absolutely elastic. (Fig.2)

A monopoly is a presence at the market only of one salesman and many customers. Both market structures express the extreme form of imperfect competition, opposition to perfection competition market.

Monopoly characteristics are following:

1. the only salesman at the market - if products are produced only by one firm, she personifies whole industry;
2. productions of specific homogeneous product which does not have near and perfect substitutes;
3. market power (situation of "price maker") - means possibility of salesman as an only producer of commodity, and at the terms of monopsony - customer as the only consumer to influence on the cost of commodity;
4. the blocked entering into industry.[5, p.247]

Barriers of including to the market are principal reason of origin of monopolies. According to the origin of barriers emit several forms:

• barriers, created by an economy from a scale
• barriers, created by the state (patents, licenses and other)
• market size
• property on the important types of raw material
• "Unfair competition".

No barriers of including are absolutely insuperable, especially in a long-term period that is why monopolies in modern reality are rare, mainly supported by the state. Market model with a single supplier for the product has close substitutes, called pure monopoly. Monopoly has the same goal, and that a competitive firm: select the output that allows you to get the maximum economic profit for the period. When selecting the optimal amount of monopoly faces three constraints - cost of production, product demand and its price. Select a monopoly can be analyzed using the same two approaches that were used in the study of patterns of competitive firms: a comparison of total revenue and total costs and marginal revenue comparisons and marginal costs .[7, p.78]

The situation of the firm - a monopolist position is fundamentally different from firms in a market of perfect competition. The main closure is to influence the market price. While a competitive firm takes market price as the value of objectively given a monopoly itself appoints the price of their products. At the same time as the monopolist can sell all their output at the same price, and assign each group a different consumers.

Possibility of a price does not mean that the monopolist will seek to Realize the full set. Since the industry represents a monopoly, it faces a market demand curve that determines the set of correlations between price and volume of demand, so arbitrary manipulation of prices is impossible. [3, p.134]

Monopoly does not offer curve. It defines the issue, focusing on the demand curve.

As we know, the demand curve is downward elasticity varies at different intervals. On small volume of elastic demand, and significant - inelastic . Total revenues for the seller elastic demand curve segment with a lower price increases, and the inelastic - decreases, reaching a maximum value at the point of unit elasticity. Therefore, the total revenue curve monopoly looks upwards convex function. Monopoly always chooses the output of elastic demand curve segment, where total revenues increased. [8, p.300]

The company - once the monopolist decides on output and price of products, while competitors only determine the amount. To optimize the production of the monopolist uses the universal rule limiting production , just as for models , and for models .[5, p.285]

Monopoly power - the ability to influence the market price - is implemented based on monopoly pricing strategy.

Monopoly firm assigns a price above the marginal costs by an amount inversely proportional to elasticity of demand. At a high elasticity of demand is low cape, the price would approximate the marginal cost, that market will be close to competitive, where a monopoly does not give special preferences.

The main objective of monopoly pricing strategy - as the largest seizure of consumer surplus and turning it into a monopoly profit. It is implemented through the policy of price discrimination - the sale of the same product to different buyers at different prices.

There are three types of price discrimination: discrimination first, second and third degree. [9, p.187]

 

Monopolistic competition - a market structure where a relatively large number of small producers offering similar goods are close substitutes, which are slightly different from each other. In monopolistic competition markets include markets books, medicine, sporting goods, coffee, soft drinks, soap, shampoo, toothpaste, etc..

Monopolistic competition has the following features:

• relatively large number of small firms
• differentiated products
• some, but limited control over price
• non-price competition
• relatively free entry into the branch and leave. [11,  p.143]

 Because differentiated products, each manufacturer of a branded product acts as a monopolist and a downward demand curve. The entry of new firms in the industry free, therefore, firms compete with each other. Despite the monopoly power of an individual firm, each too small to significantly affect the overall market situation, and it does look like a competitive market. So, in monopolistic competition considerable competition combined with low monopoly power over the market. [8, p.68]

The concentration of production in areas with monopolistic competition is not high. Lerner index for the market is monopolistic competition in between zero and unity.

Oligopoly - the industry in which most of the sales made by several large companies, each able to influence the market price of our own actions. Oligopoly refers to the actual market structures and the most common in modern high-tech industries.

Oligopoly market covers a considerable space between pure monopoly and monopolistic competition. It exists when the number of firms in the industry is so small that each of them in determining their pricing policies must take into account the response from competitors. [9, p.164]

Oligopoly distinguishes the following features:

• small number of firms in the field
• homogeneous or differentiated products
• universal interdependence of firms
• considerable control over price
• significant barriers to entry area.

Barriers to entry in Oligopolistic industry are quite high and constitute one of the reasons for the spread of oligopoly. The main entry barrier serves as economies of scale. A special reason for the existence of oligopoly is the effect of the merger. To encourage the firm mergers: the desire to achieve greater economies of scale and enhance their market power to eliminate a competitor, to gain the benefits of the big buyer in the market resources, and more. [12, p. 200]

Complexity of a model of oligopoly are two main reasons. First, the oligopoly has many manifestations. There is a "tight oligopoly" where the firm rule 2.3 on the whole market, and "vague" followed by the 70-80% market share 6.7 firms. Firms can act in secret combinations, and can make decisions independently. Products Oligopolistic industry can be standardized and differentiated. Barriers to entry in different areas and different. Secondly, the existence of universal relationship between companies, inability to predict the reaction of competitors is the main factor of uncertainty. [13, p.153]

The problem of strategic interaction between firms is central to the study of behavior olihopolistiv. Strategic decisions Oligopolistic firms studied using game theory. Economic games can be cooperative or noncooperative. The game is cooperative if the players' possible collusion and noncooperative, if a conspiracy between members is unacceptable.

There are concepts of dominant and non-dominant strategies. The dominant strategy is the optimum choice player, regardless of competitor. Non-dominant strategy is the optimum choice depending on one player that makes the opponent.

If one player acts in a lack of information or dealing with inappropriate subject of maxmin strategy is applied. It allows you to maximize the minimum profit.

In single or repeated games both players decide simultaneously in sequential - one by one, in which case the author has the advantage. The action, which gives the company an advantage, is called a strategic move. In the course of a game company can use threats and commitments: to resort to closure or withdrawal of certain facilities, or announcing the intention to produce a particular product. The firm can threaten lower prices - meaning that it starts a price war. [12, p.173]

In Oligopolistic market are two oppositely directed forces: companies interested in maximizing the total mass of profit for the industry, which generates a craving for conspiracy and joint action, and selfish interest of each company in maximizing its own profits by lowering product prices, pushing the company to breach agreements. "The olygopolists dilemma" reflects the impact of these two forces competing for decisions: whether to resort to aggressive competition, trying to capture more market share at the expense of rivals, or passively coexist, holding its market share by appointing high prices and limiting production. Competing passively, all receive higher profits. However, everyone realizes that rivals feel the temptation to bring down prices. Therefore, firms compete passively afraid, because the opponent may suddenly go on the offensive and capture significant market share. Neither firm can not trust their competitors, and expect from him a high price. The main difficulty in building a model of oligopoly behavior - this constraint faced by the firm. In general limitations - costs of production and demand - olihopolist specific constraints: the actions of competing firms. Behavior of firms from the reaction of competitors called Oligopolistic relationship. [10,  p.221]

In microeconomics is no single model of oligopoly. Developed partial equilibrium model - model Cournot, Stackelberg, Bertrand and a number of modifications, as well as generalized Nash equilibrium model - to determine the equilibrium volume of equilibrium price and Oligopolistic firms. Nash equilibrium - a set of such strategies, where each subject chooses the economy works best for you actions, based on the fact that others adhere to some (this) strategy. Because each player has no reason to deviate from the optimum, these strategies are stable. [14, p.86]

 

 

 

 

 

 

 

2. Models of company’s strategic behavior on the oligopoly market

 

Cournot model - a model of simple duopoliyi - oligopoly with two firms that produce homogeneous products. Each firm chooses output, which maximizes its profits, according to her ideas on possible solutions to competitors.

 

 

 

Each duopolist consider another production as fixed, the value of which is independent of its own production decisions. Both firms make decisions simultaneously. The price that the company will take will depend on the total output of both firms. Both firms have equal economic strength and produce a uniform product for their known linear function of market

demand: , where and – volumes of firm 1 and firm 2. If firm 2 is not produced products, i.e. , the curve of demand for a firm complying with the market demand curve. If the company providing the first   two units of market demand, then the demand curve for products of the company determined an equation:

or .

Firms maximize profits by producing the optimal output, defined by the rule , according to their functions reactions:

 

Two oligopolists reactions are presented in (Fig.1). Assuming that the firm produces a first volume , that firm 2 will produce a volume that corresponds (point A) on its reaction curve . Firm 1 will react to this choice of an appropriate volume level (point B) on its reaction curve . This decision will make the company a firm in February to review its own decision and she will choose the appropriate volume (point C) on its reaction curve . The end result of the process of adaptation is to establish a stable equilibrium point at the intersection of two curves of the reaction. [1, p. 144].

 

Set levels of two companies to match the equilibrium is called a Cournot equilibrium, which is a type of Nash equilibrium.

Bertrand model describes a market situation in which the two firms, as in the Cournot model, produce a homogeneous product. But the changing strategic indicator - firms choose prices rather than output volumes (Fig.1.2). Price competition forces both companies to lower the price to marginal cost , where they receive zero economic profit. Firms reach Nash equilibrium, which in this case is the competitive equilibrium.

Price war - a series of successive reductions in the prices of Oligopolistic market firms rivals. She is one of many possible consequences of Oligopolistic rivalry. Price wars are positive for consumers, but negative for profit vendors.

Suppose that locally there are several vendors for realizing such a standardized commodity, like bricks. Pricing of any given firm in the market depends on market demand for bricks and on how the company envisions the reaction of competitors in its price. Suppose that each firm in the market seeks to maximize profit. Assume that each firm assumes that its competitors will choose the price and will adhere to its decision. Thus, any given brick manufacturer will assume that if it will lower its prices, its rivals, in response to such a move will not lower their prices. They can start a price war. Since each seller thinks that the other will not respond to its lower prices, so each one is tempted to increase monthly sales by reducing prices. Lowering the price below the price of its competitor, each seller can capture the entire market and thus increase profits. [4, p.100]

The price war continues until the price falls to the level of average costs. In equilibrium, both sellers designate the same price, and economic profits are zero. The total market output is the same that would be in perfect competition.