Discuss one of the market models (pure competition, monopolistic competition, oligopoly, and pure monopoly) and provide an example of a real-world market that matches the market model you chose. What does economic theory teach you about the industry you chose?

 

Oligopoly

An oligopoly is a type of market model which is dominated by a small number of large firms which sell products that are either differentiated or identical. The differentiated product oligopoly tend to focus on goods that are sold for personal consumption hence due to the fact that people enjoy variety of products that may serve a similar purpose, they are differentiated from one oligopoly to another eg, automobiles, computers etc. For the identical product oligopoly, such a firm tends to process raw materials or produce intermediate goods which are used as inputs by other industries. Eg, steel, aluminium, petroleum.

The Airline industry in the US is one real-world market example of an oligopoly. It is dominated by four major domestic Airlines which are the Delta Air Lines, The American Airlines, the United Air lines and the South-West Airlines. These four Air Lines dominate the industry and in cooperation, they have the market power to set prices or alter prices for their services through establishing of various output levels.

Based on the economic theory, oligopolistic firms are interdependent meaning that they are affected not only by their own decisions regarding how much to produce or the prices to set, but also by the decisions of other oligopolistic firms. This interdependence is explained through the game theory model situation whereby each actor must consider how others might respond to the actions they take while making decisions on a course of action

Step-by-step explanation

An oligopoly is a type of market structure or model in which there are few firms that produce a product which serves almost the same purpose. The firms here produce either differentiated products such as automobiles, airline service industries, or identical products the steel industries, aluminium , petroleum as explained above.

A real world market example of an oligopoly is the US Airline industry which is dominated by the four main  major Air Lines which are: The American Airlines, the United Air Lines, The Delta Air Lines and the South-West Airlines. These four Air Lines are the mainly used within the US hence they have the power to collaborate and influence the prices. However, they must be interdependent in the sense that actions of one Air Line can affect how others respond making it lose its customers to the others.

According to the economic theory, the game theory which is explained using the nature of interdependence in oligopolies is mainly applied. This means that each actors decisions are affected by the decisions of the others, therefore, the actors have to consider how the other actors will react in relation to the decisions they take such as altering of prices.