Microeconomics

1. In the business environment, not so many business spheres include monopolistic companies. An oligopolistic market structure is much more common. This structure is characterized by the presence of a few interdependent firms. Many scholars consider oligopolies to be a complicated market structure to study (Herriges, 2010). They explain that oligopolistic companies have some market power and, at the same time, they compete but not so actively (Selhorst, 2009). It is possible to name their competition “imperfect” (Herriges, 2010, p. 4) because they do not have a chance to compete properly, as they have to cooperate in certain situations. Oligopolies are highly influential at the market and they can dictate some rules; therefore, “the market power of the oligopoly will typically result in higher prices and lower production levels in the market than would be efficient” (Herriges, 2010, p. 4). At the same time, constant competition and numerous attempts of oligopolies to cheat on each other make this market structure similar to a monopoly as any of such companies tries to be a market leader but it has to cope with the rivals. A great variety of interactions that the oligopolistic companies may have unites them or forces to have some conspiracies; this fact contributes to the necessity to have a complex approach to studying this market structure. The main characteristics of an oligopolistic market structure also include interdependence (when the actions of one firm influence the actions of the other firm) and barriers created for the entry of new companies on the market (Herriges, 2010).

2. A concentrated market is typical for an oligopolistic market structure. Its main characteristics are as follows:

· promotion of collusion;

· fewer producers than on the non-concentrated markets;

· companies, having better control of the prices;

· producers, having an agreement over the production outcome (Sehlhorst, S., 2009);

· possessing HHI of more than 1800 (Herriges, 2010).

3. An industry is an oligopoly, if it possesses the following traits:

· representation of a concentrated market, controlled by a few companies;

· these few companies control most of the market sales;

· it has an interdependent group behavior;

· possession of HHI of more than 1000;

· is characterized by an indeterminate demand curve.

The latter factor is explained by the fact that any change in price by one firm leads to the other firm (or other firms in some cases) changing their prices. Therefore, a demand curve shifts all the time in the case of oligopoly (Herriges, 2010).

4. The notion of a relevant product market is often considered regarding an oligopolistic market structure. It consists of two parts:

· a “product market that comprises all those products and/or services which are regarded as interchangeable or substitutable by the consumer by reason of the products’ characteristics, their prices and their intended use” (“Definition of Relevant Market”, 2011, para. 4);

· a geographical market, covering not the product, but the area, in which the firms, having homogeneous competition, are concentrated.

A relevant product market analysis is based on the following criteria:

· demand-side sustainability (of customers);

· supply-side substitutability (of suppliers) (“Definition of Relevant Market”, 2011).

5. The process of consolidation can become a logical step in a company’s development. It takes place, when two companies:

· have the aim of gaining more profit, although the experience of some enterprises demonstrates that they do not reach this aim;

· “combine to form a new enterprise altogether” (“Consolidation Strategy”, n.d., para. 2);

· eliminate competition;

· create a broader company in terms of scale or scope (“Consolidation Strategy”, n.d., para. 2).

6. A market can consolidate by two possible ways:

· merging – it takes place, when companies abandon their previous brands and unite their activities and potentials under a new trademark;

· acquisition – in this case, an acquired company starts functioning under the brand of an acquirer (“Consolidation Strategy”, n. d.).

7. As it was mentioned above, oligopoly is a complex structure that is not easily investigated. The strategic behavior of oligopoly was called a “game” and it gave birth to a new game theory in economics and mathematics. In case of oligopoly, the easiest way to understand the strategic behavior of the companies is an example of duopoly, when only two companies are present on the market. In such a case, they can either form a cartel (when both companies will obey the output limits for the sake of the joint financial profit) or face a prisoner’s dilemma game, a bright example of non-cooperation, when two companies’ owners try to start a price competition and they cannot explicitly collude. Their numerous interactions in trying to solve the dilemma turn into a repeated game or a tacit collusion (Herriges, 2010), “when the firms attempt to control overall output (and hence price) indirectly without a formal agreement” (Herriges, 2010, p. 23). Thus, strategic behaviors of oligopolistic companies can be explained from the point of view of a game theory. All of them prove the interdependence of the companies within the discussed market structure. In fact, the interdependence of the companies is considered the essence of oligopoly. In addition to the price mutual dependence, which is discussed in the context of the demand curve, there exist output interdependence and strategic interdependence, when oligopolistic companies try to predict the actions of each other as these steps will influence all the game members (Herriges, 2010). Therefore, the mutual dependence of the firms in oligopoly dictates the rules for their strategic games.

8. HHI is used for measuring market concentration (Selhorst, 2009). It determines “if a company is operating monopolistically” (Selhorst, 2009, para. 1) or it is used “to determine if a merger needs to be explored from an anti-trust perspective” (Selhorst, 2009, para. 1). The mentioned perspective deals with the prohibition of a trust as a form of collusion, when the companies’ shares are managed by the board of trustees.

9. HHI is calculated as HHI, where the percentage of the market controlled by firm and N is the number of the firms, controlling the market (Herriges, 2010). Selhorst (2010) simply explains that in order to calculate the HHI, an economist has to take the market share possessed by each company and square it. These values should be added to get the HHI.

10. Selhorst (2010) states that the U. S. government, applying HHI, classifies markets as competitive, moderately concentrated, and concentrated ones. In case of a monopoly, the range of HHI is taken from 0 to 10000. The U.S. Department of Justice offers the following cutoffs: (1) if the HHI is less than 100, it is possible to speak about a highly competitive market; (2) if the index varies between 100 and 1000, this market is concentrated; (3) a value between 1000 and 1800 indicates that it is a moderately competitive market; (4) when the HHI is more than 1800, such a market is highly concentrated (Herroges, 2010). Selhorst (2009) has made an interesting investigation about when an economist should stop, calculating the data about the market shares of different companies. He states that if a researcher calculates the HHI of the industry and a new member appears, he may add one more value and observe the change Selhorst, 2009). He may repeat the same action repeatedly, but when he sees that there is no significant change in the HHI value, he may stop and leave the market share already analyzed as it is (Selhorst, 2009). The HHI is a key factor in analyzing possible merges. If an attempt of a calculated merger gives an increase of the HHI by less than 100 points, then the merger is safe. The market power or the amount of influence that a company has will also change due to the application of some consolidation form and the calculation will demonstrate it. The HHI helps to understand better how significant a merger can be and what consequences it may have. There is also another not very common way of analyzing the merges, when the market shares of some top firms in different industries are taken into consideration and assessed, but this method serves as an auxiliary technique (Herriges, 2010).

11. As the main purpose of consolidating the market is gaining financial benefits, AT&T Company decided to use the method of acquisition. It stated that acquiring T-Mobile, another powerful operator, would solve some significant problems, namely destructive low pricing and innovations aggressively implemented, fighting for the market place. Although the benefits announced by AT&T seemed to be obvious, the government decided to give some thorough consideration to this question. After all, wireless mobile communication is an essential element of life for many Americans. In the USA, there are four major wireless connection providers: AT&T, T-Mobile, Sprint and Verizon. Each of them has an important market share, and eliminating AT&T means leaving the customers without reasonable prices on mobile communication. The Acting Attorney General mentioned this fact and added that the customers would also see the lack of innovations in case of the discussed acquisition (The United Sates Department of Justice, 2014). As a result, the Department of Justice finally decided that “the proposed $39 billion transaction would substantially lessen competition for mobile wireless telecommunications services across the United States, resulting in higher prices, poorer quality services, fewer choices and fewer innovative products for the millions of American consumers” (The United States Department of Justice, 2011, para. 2). The verdict of the U.S. Government is quite logic. It explains why it has decided not to contribute to a material profit a big-scale business of AT&T. Thinking ahead of the negative consequences that the customers would have was a reasonable decision. Not only has the U.S. Government managed to prevent the increase in prices for mobile services and ensure that some innovative ideas would be regularly implemented, but it also has managed to promote competition that can be a powerful engine for business development.

12. In the USA, there exists quite a significant number of oligopolistic industries. The beer production, music industry, and airlines are among them. One of the brightest examples of oligopoly, representing not duopoly but consisting of 6 influential companies is the US Film Industry: Disney, Paramount, Warners, Columbia, 20th Century Fox and Universal) (Herriges, 2010). All these companies are powerful producers, but they are claimed to be fully dependent on the decisions of their owners, who do not know the traditions and professional atmosphere of Hollywood. As Barnes (2011) states, “Columbia Pictures, Paramount Pictures, 20th Century Fox, Universal Pictures and Warner all answer to bosses in New York. Walt Disney Studios is the sole major film operation that has a local owner” (para. 12). Disney has the greatest market share of approximately 28%. Knowledge of the local traditions of film production and business development contributes to the success of the company. The HHI of the U.S. film industry is 1,450, which confirms the fact of an existing oligopoly. It is a moderately concentrated (competitive) market (Herriges, 2010). The increases of the HHI indicate a decrease in competition and an increase of a market power within the oligopoly.