Oligopoly 353common technology standards (for high-definition television or DVDs, for
instance) so as to promote overall market growth. Firms in the same market
also might join in shared research and development programs. Coopetition
also occurs when a company and its input supplier cooperate to streamline
the supply chain, improve product quality, or lower product cost. In short, oli-
gopoly analysis embraces both the threat of substitutes and the positive
impacts of complementary activities.
Finally, the potential bargaining powerof buyers and suppliers should not be
overlooked. For instance, the pricing behavior of a final goods manufacturer
depends on the nature of the customers to whom it sells. At one extreme, its
customers—say, a mass market of household consumers—may have little or no
bargaining power. The manufacturer has full discretion to set its price as it
wants (always taking into account, of course, overall product demand and the
degree of competition from rival firms). At the other extreme, a large multi-
national corporate buyer will have considerable bargaining clout. Typically,
such a buyer will have the power to negotiate the final terms of any contract
(including price), and indeed it might hold the balance of power in the nego-
tiation. (The producer might need the large buyer much more than the buyer
needs the producer.) In the extreme, the buyer might organize a procurement
and ask for competitive bids from would-be goods producers. In this way, the
buyer uses its power to maximize competition among the producers so as to
secure the best contract terms and price. (Negotiation and competitive bid-
ding are the subjects of Chapters 15 and 16, respectively.) Of course, the same
analysis applies to the firm’s relationships with its suppliers. We know from
Chapter 7 that the firm will receive the best possible input prices if its suppli-
ers compete in a perfectly competitive market. On the other hand, if the num-
ber of suppliers is limited or if actual inputs are in short supply, bargaining
power shifts to the suppliers who are able to command higher prices.Industry Concentration
As noted earlier, an oligopoly is dominated by a small number of firms. This
“small number” is not precisely defined, but it may be as small as two (a
duopoly) or as many as eight to ten. One way to grasp the numbers issue is
to appeal to the most widely used measure of market structure: the concen-
tration ratio. The four-firm concentration ratio is the percentage of sales
accounted for by the topfour firms in a market or industry. (Eight-firm and
twenty-firm ratios are defined analogously.) Concentration ratios can be
computed from publicly available market-share information. Ratios also are
compiled in the U.S. Census Bureau,released by the government at five-year
intervals. Table 9.1 lists concentration ratios for selected goods and services
compiled from both sources. Notice the progression from highly concen-
trated to less concentrated industries.c09Oligopoly.qxd 9/29/11 1:32 PM Page 353