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    Oligopoly Economics

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    An oligopoly is a market structure dominated by a small number of firms that collectively control the market. There are at least two firms in an oligopoly and they are interdependent as each firm must consider how its competitors will respond to its pricing and output decisions. Common characteristics of an oligopoly include firms producing branded or differentiated products, high barriers to entry, and firms acting as mutual price-makers rather than price-takers. Pricing outcomes in an oligopoly can vary depending on the degree of competition or cooperation between firms.

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    Oligopoly Economics

    Uploaded by

    uday99says
    2K views14 pages
    An oligopoly is a market structure dominated by a small number of firms that collectively control the market. There are at least two firms in an oligopoly and they are interdependent as each firm must consider how its competitors will respond to its pricing and output decisions. Common characteristics of an oligopoly include firms producing branded or differentiated products, high barriers to entry, and firms acting as mutual price-makers rather than price-takers. Pricing outcomes in an oligopoly can vary depending on the degree of competition or cooperation between firms.

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    An oligopoly is a market structure dominated by a small number of firms that collectively control the market. There are at least two firms in an oligopoly and they are interdependent as each firm must consider how its competitors will respond to its pricing and output decisions. Common characteristics of an oligopoly include firms producing branded or differentiated products, high barriers to entry, and firms acting as mutual price-makers rather than price-takers. Pricing outcomes in an oligopoly can vary depending on the degree of competition or cooperation between firms.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    2K views14 pages

    Oligopoly Economics

    Uploaded by

    uday99says
    An oligopoly is a market structure dominated by a small number of firms that collectively control the market. There are at least two firms in an oligopoly and they are interdependent as each firm must consider how its competitors will respond to its pricing and output decisions. Common characteristics of an oligopoly include firms producing branded or differentiated products, high barriers to entry, and firms acting as mutual price-makers rather than price-takers. Pricing outcomes in an oligopoly can vary depending on the degree of competition or cooperation between firms.

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    Download as ppt, pdf, or txt
    of 14

    |   

    
    

     |  
    = == 

    `
     : A  dominated by a small number
    of participants who are able to collectively exert
    control over  and   .

    The word  is derived from the Greek word


    oligos which means . An oligopoly is much like
    a monopoly, in which only one company exerts control
    over most of a market. In an oligopoly, there are at
    least two firms controlling the market.
    

      

     It is dominated by a few large suppliers who


    are interdependent on each other, before
    making any   and   
      
     . It is also explained as a market
    condition in which sellers are so few that an
    action of any one of them will materially
    affect price and have a measurable impact
    on competitors; in other words; since there
    are few participants in this type of market,
    each 
    
      is aware of the actions of
    the other.
    u 
      
    
    = 

     A few firms selling similar product.


     Each firm produces branded products.

     Likely to be significant entry barriers into


    the market in the long run which allows
    firms to make supernormal profits.
     Interdependence between competing
    firms. Businesses have to take into
    account likely reactions of rivals to any
    change in price and output.
    o Products can be homogenous (standardized)
    or heterogeneous (differentiated).

    o The sellers are the price makers and not price


    takers, since the few sellers mutually dominate
    the pricing decisions.

    o The sellers can achieve 


    
     
     ;
    since for the large producers as the level of
    production rises, the cost per unit of products
    decreases; thus ensuring higher profits.
    
    
    =
    =
    = == 

    
    

     è `
    
    ÿ A Duopoly, is a simple form of
    Oligopoly in which only two firms dominate a
    market. e.g.:ÿ   
      
    ! " 
     D 
    
    # In Oligopsony, there are
    few buyers and large number of sellers. The
    other characteristics are same as Oligopoly.
    e.g.:ÿ 

    , where we have three major
    firms   $ " `  |   
      
     · %  
    
     ÿ A market with a
    few sellers (oligopoly) and a few buyers
    (Oligopsony) is referred as Bilateral
    Oligopoly.
     Î  # åhen there is a formal
    agreement among the Oligopolist for a
    collusion (to increase prices and restrict
    production in the same way as a monopoly)
    with an objective to reduce risk and foster
    joint profit it is termed as Cartel. e.g.:ÿ
     & 
    
    "
     '
    
    
     ()
      
    
     
    
    

    There are 
     major theories about oligopoly pricing:
     Oligopoly firms collaborate to charge the monopoly
    price and get monopoly profits
     Oligopoly firms compete on price so that price and
    profits will be the same as a competitive industry
     Oligopoly price and profits will be between the
    monopoly and competitive ends of the scale
     Oligopoly prices and profits are "indeterminate"
    because of the difficulties in modeling interdependent
    price and output decisions.
    " 
       $*
    # 
    
    
    
    Œirms compete for market share and the demand from
    consumers in lots of ways. åe make an important distinction
    between  
    
     and *
    # 
    
    .
     
    
     can involve discounting the price of a
    product (or a range of products) to increase demand.
    *
    # 
    
     focuses on other strategies for
    increasing market share. Consider the example of the highly
    competitive UK supermarket industry where nonÿprice
    competition has become very important in the battle for
    sales. It includes:
    * |ass media advertising and marketing.
    * Store Loyalty cards.
    * Banking and other Œinancial Services (including
    travel insurance).
    * Inÿstore chemists/post offices/crèches.
    * rome delivery systems.
    * Discounted petrol at hyperÿmarkets.
    * Extension of opening hours (24 hour
    shopping in many stores).
    * Innovative use of technology for shoppers
    including selfÿscanning machines.
    * Œinancial incentives to shop at offÿpeak
    times.
    * Internet shopping for customers.
       "
    
      
    | 

    åhen one firm has a dominant position


    in the market the oligopoly may
    experience price leadership. The firms
    with lower market shares may simply
    follow the pricing changes prompted by
    the dominant firms. åe see examples of
    this with the |ajor |ortgage lenders and
    Petrol retailers.
    u  
    
    
    
     This assumes that firms seek to maximize profits.
     If they increase price, then they will lose a large share of the
    market because they become uncompetitive compared to
    other firms, therefore demand is elastic for price increases.
     If firms cut price then they would gain a big increase in
    |arket share, however it is unlikely that firms will allow this.
    Therefore other firms follow suit and cut price as well.
    Therefore demand will only increase by a small amount:
    Demand is inelastic for a price cut
     Therefore this suggests that prices will be rigid in Oligopoly
     The diagram suggests that a change in |arginal Cost still
    leads to the same price, because of the kinked demand
    curve( remember profit max occurs where | = |C

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