Description                                  
The price war that exists between Marge and Maggie demonstrates the nature of oligopoly. In this presentation, the narrator defines oligopoly; describes the different barriers to entry for oligopolies; examines the motivations of an oligopolist; and, explains how and why cartels are organized. 

Narrator: 
Oligopoly describes a market dominated by a few firms. In the world market, there are oligopolies in steel production, automobiles and semi-conductor manufacturing. But, oligopoly also describes conditions in smaller markets where a few gas stations, grocery stores or alternative burger restaurants dominate in their fields. A distinguishing characteristic of oligopoly is the interdependence of firms. Marge and Maggie operate in an oligopoly. The actions of Ostrich Burger effect the actions of Emu Burger and vice versa. 

Marge: 
Anything I do, Maggie does. I sold O'Burgers for years at $3.00 each. Then in comes Emu Burger disturbing the peace. My loyal customers deserted me. They had to try the new burgers, and besides, they were cheaper. I had no choice but to cut my prices. 

Narrator: 
An all-out price war ensues as the two competitors fight to attract customers. Each is acutely aware of what the other is doing. Marge decides she must insulate herself from this interdependence by differentiating her product. 

Marge: 
I think it's time to visit old Mort. See if I can get a jump on the competition. 

Narrator: 
Marge vies for customer loyalty through advertising and innovation because loyal customers are less sensitive to price changes. Oligopolies tend to exist in markets where there are barriers to entry. 

Narrator: 
In the world of auto manufacturing, a barrier to entry is economy of scale. To compete with existing manufacturers, a new entrant must produce enough cars to reach an efficient scale of operation. 

Narrator: 
In the semi-conductor industry, high cost is a barrier to entry. Tooling a new plant can cost millions, or even billions of dollars. 

Narrator: 
In Pleasantville, the size of the market is still a barrier to entry. Years ago, when Pleasantville was smaller, Marge had a monopoly. Now the market has grown to where it can support two, but only two, alternative burger restaurants. 

Narrator: 
In a market where there are very few firms, there is the temptation to collude and form a cartel in an attempt to keep prices high and as a unified group, act as a monopoly. However, attempts to maintain a cartel often fail because of differences in costs to each firm and the temptation to cheat. If a firm sells at just below the agreed upon price, it can make a considerable gain. 

Narrator:  
A well known example of a cartel is the Organization of Petroleum Exporting Countries or OPEC which has often tried to limit the supply of oil and drive prices up. 

Narrator: 
The motivation of an oligopolist is different than that of a monopolist or a perfect competitor. Oligopolies tend to be predatory and may sacrifice profit for a gain of market share. The ultimate intention is to force competitors out of business and assume a position of monopoly. 

Narrator: 
Therefore, the profit maximizing models used to analyze other market structures often do not apply. In oligopoly, the behavior of firms cannot be explained by a single general model. 

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