Oligopoly is a market structure where few companies are in control of their market in terms of determining the operating dynamics. As compared to purely competitive markets where firms in spite of their size do not influence the direction of the market when they implement their decisions, oligopolistic situation has massive implications on competitors when strategic decisions are made by one rival. For instance, provision of new services or introduction of powerful marketing has consequential implications on the profit margins of competitors hence the necessity of considering behavioral patterns from the competition before making economic decisions.
However, it is increasingly difficult to predict oligopolistic behavior due to working complexities and relationship intricacies between contending entities. Economists have been faced with analytical challenges while trying to analyze oligopolistic behaviors even if they have implemented evaluative models like the game theory. One of the causative agents of difficulties is that oligopolies determine their own pricing mechanisms and it is not possible to determine how other firms intend to respond to such changes. Although it tends to reduce profitability and increase competitiveness, not all firms respond in the same way when faced with one organization that has altered its pricing model.
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"Oligopoly Behavior".
For instance, some firms may respond by increasing their product quality, marketing efforts, provision of complimentary offers, and other strategic provisions that promise to retain clients despite presence of more affordable options. This is indicative that oligopolies have complex relations and response patterns to competitor decisions since their business operations are independent of each other. In fact, the challenge is anticipating how companies react towards each other’s decisions despite the fact that they are dominating the same market segments. In other words, business choices being faced by oligopolies are strategic in nature, interdependent on competitor decisions, and the governing variables are difficult to isolate and predict.
The market structure of oligopolies is another cause for challenge when performing analysis and prediction of behaviors among the involved firms. According to Myers and Tauber (32), the market structure is characterized by few firms that supply or produce most of the commodities required in a particular market. As per the structure, firms are not normally involved in price wars since it leads to lower profits; instead, firms focus on other aspects that improve their overall standing within their respective industries of specialization. Such occurrences makes it difficult to predict how firms behave since their competition is not governed by conventional market dynamics but the ones that shape industry processes in favor of particular products or services.
On the other hand, dominant firms are constantly changing their strategic approaches and alliances generating an unpredictable behavioral pattern that cannot be modeled. For instance, firms may make implicit and explicit agreements to avoid and limit competitive tendencies amongst themselves. Since profits and actions are controlled by these relations and mutual interdependencies, it is not possible to understand behaviors especially when agreements are done without the knowledge of external parties. It is difficult to understand how agreements like pricing, marketing, sales, and other decisions are made since their intention is to reduce uncertainty, as well as provide avenues for generating potential monopoly profits.
Determination of demand curves and their influence in particular markets is particularly complex taking into consideration that firms react in situations characterized by mutual interdependence. No firm knows how its demand curve looks like with specific degree of specificity hence little knowledge about their marginal revenues. This forms the basis for developing assumptions when equating marginal costs and revenues which is guesswork when trying to maximize profit maximizing decisions. Due to the existence of unpredictable variables that are intricately interconnected, it becomes difficult to predict behaviors of oligopolies.
