In the ice cream industry, how does the government influence oligopoly behavior?

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krishna-agrawala | College Teacher | (Level 3) Valedictorian

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Oligopoly refers to market condition where a few dominant firms control the total supply of a particular type of product. Each form in the oligopolisic market has significant influence over the prices of product and the quantity supplied.

The oligopoly lies somewhere between two other types of market behavior, classified on the basis number of dominant suppliers and their ability to influence the prices and supplies. These are free competition and monopoly. In free competition there are a large number of suppliers selling undifferentiated product. None of the suppliers is able to influence the market price. In monopoly there is only one dominant firm wit no effective competition from other suppliers. A monopolistic firm has much greater control over product prices and supplies than is possible in free competition or oligpolistic competition.

Because of their ability to set market price and regulate supplies, the monopolies, in their attempt to increase their market position and profits, can sometimes manipulate market in a way that is against the interest of people. Some dominant organizations in oligopolistic market can also harm the interest of people in a similar way. Therefore most of the government including the ones in the countries considered to be be champions of free market try to regulate the functioning monoplies and ologopolies to protect public interest. These actions by the government applies to all types of industries including ice cream industry.

When it comes to monopolies, the government may insist that a monopoly is broken down in smaller companies. This type of action was taken in USA for telecommunication industry about half a century back.

In case of oligopolies the government action is directed primarily towards two possibilities. Several oligopolistic firms forming a cartel so that they can together act like a monopolistic firm. For example, recently airlines companies were accused of cartelization because many of them increased fare almost simultaneously. Governments also try to prevent oligopolistic firms from using unfair trade practices to overcome competition. For example Microsoft is currently fighting multiple legal cases for charges of unfair trade practices levelled against them.

In addition to specific provision of these types described above directed specifically against monopolies and oligopolies, their are many legal provision to protect consumers from malpractices by companies, who in general possess much more economic power than individual consumers. Some of these provision relate to product quality, warranties, and guarantees. For example, in case of ice cream, government may specify minimum percentage of milk content in a product  sold as ice cream.