The level of competition in pricing and output decisions under an Essay

The level of competition in pricing and output decisions under an oligopolistic market structure - Essay Example There was much experimentation with forms of business structures until the pattern of oligopoly finally evolved. In the United States, during the last quarter of the 19th century, businesses avoided competition by forming trusts. Under this structure, the leading firm in one industry would hold voting stock in its former competitors. Output could be limited and prices kept high. In many parts of Europe, cartels were legal. Firms in the same line of business would enter into a formal and enforceable agreement to limit production, and maintain high prices. But both agreements; trusts and cartels brought business stability and profits at the cost of high consumer prices, limited new investment (in order to limit production of products) and a diminution of the type of competition that drives firms to develop new products and new production processes. However, many modern markets are oligopolistic. The growth of oligopoly poses problems both for economic theory and policy because only a handful of large firms produce most of the output in these industries. An oligopoly market exhibits many sellers but is concentrated on only a few sellers. Market shares matter because these few firms control majority of the entire market with some assistance from new technologies. Institutionalists claim that the structure of oligopoly leads to a form of administered pricing.