Description
Describing Characteristics of Oligopoly with help of various curves.
Oligopoly
Characteristics of Oligopoly
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Only a few firms supply goods for the entire market; the goods may be either homogenous or differentiated. The firms are mutually interdependent and hence their pricing, output and other business policies are always dependent on their rivals’ reactions. A firm’s demand curve in an oligopoly market is indeterminable, because the output and price are dependent on the rivals’ reactions. Entry is very difficult or impossible.
Classification of Oligopoly
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Based on product differentiation: Based on product differentiation market can be classified into two types : Differentiated oligopoly Pure oligopoly Differentiated Oligopoly: The firms sell goods that are similar but not identical. Product differentiation may be in terms of quality, quantity, services, etc. E.g. Automobiles, cigarettes, etc. Pure Oligopoly: The firms sell homogenous or standardized goods. E.g. Steel, petrol, and aluminum
Classification of Oligopoly
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Based on Collusion: Non-collusive Oligopoly: A market is said to be a non-collusive oligopoly when the members of the group compete with one another. E.g. Automobiles Collusive Oligopoly (Cartels): In collusive oligopoly, the members come to an understanding among themselves to promote their common interests. E.g. OPEC and cement
Oligopoly
• Characteristics Small number of large firms. Product differentiation may or may not exist High barriers to entry. • • • • • Examples Aviation Steel Aluminum Petrochemicals
Oligopoly
• The barriers to entry are:
• Scale economies • Patents • Technology • Name recognition
Oligopoly
• Management Challenges
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Strategic actions Anticipating Rival behavior
Oligopoly
• Equilibrium in an Oligopolistic Market
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In perfect competition, monopoly, and monopolistic competition the producers did not have to consider a rival’s response when choosing output and price. In oligopoly the producers must consider the response of competitors when choosing output and price.
Oligopoly
• Equilibrium in an Oligopolistic Market
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Defining Equilibrium • Firms doing the best they can and have no incentive to change their output or price • All firms assume competitors are taking rival decisions into account.
Collusions
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Since the number of firms in Oligopoly are very few, whenever these few firms would collectively decide to dominate the market price, the situation is referred to as a collusion. Collusion is an agreement, usually secretive, which occurs between Oligopolistic firms to limit open competition by deceiving, misleading, or to obtain an objective forbidden by law typically by defrauding or gaining an unfair advantage. It is an agreement among firms to divide the market, set prices, or limit production.
Dilemma for Oligipolistic Pricing
• In some oligopoly markets, pricing behavior in time can create a predictable pricing environment and implied collusion may occur.
• In other oligopoly markets, the firms are very aggressive and collusion is not possible. (Eg. Coke and Pepsi) • Firms are reluctant to change price because of the likely response of their competitors.
• In this case prices tend to be relatively rigid.
The Kinked Demand Curve
Rs/Q
If the producer raises price & the & competitors don’t, the demand will be elastic. If the producer lowers price, the competitors will follow and the demand will be inelastic.
D
Quantity
MR
The Kinked Demand Curve
Rs/Q
So long as marginal cost is in the vertical region of the marginal revenue curve, price and output will remain constant.
MC’ P* MC
D
Q* MR
Quantity
Dilemma for Oligopolistic Pricing
Price Signaling & Price Leadership • Price Signaling
• Implicit collusion in which a firm announces a price increase in the hope that other firms will follow suit. • Price Leadership • Pattern of pricing in which one firm regularly announces price changes that other firms then match
The Dominant Firm Model
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In some Oligopolistic markets, one large firm has a major share of total sales, and a group of smaller firms supplies the remainder of the market. The large firm might then act as the dominant firm, setting a price that maximized its own profits.
Cartels
• Characteristics 1) Explicit agreements to set output and price 2) May not include all firms
Cartels
Characteristics Most often international – Examples of successful cartels • OPEC • International Bauxite Association
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Examples of unsuccessful cartels • Copper • Tin • Coffee • Tea • Cocoa
doc_438081040.ppt
Describing Characteristics of Oligopoly with help of various curves.
Oligopoly
Characteristics of Oligopoly
?
?
?
?
Only a few firms supply goods for the entire market; the goods may be either homogenous or differentiated. The firms are mutually interdependent and hence their pricing, output and other business policies are always dependent on their rivals’ reactions. A firm’s demand curve in an oligopoly market is indeterminable, because the output and price are dependent on the rivals’ reactions. Entry is very difficult or impossible.
Classification of Oligopoly
?
? ? ?
?
Based on product differentiation: Based on product differentiation market can be classified into two types : Differentiated oligopoly Pure oligopoly Differentiated Oligopoly: The firms sell goods that are similar but not identical. Product differentiation may be in terms of quality, quantity, services, etc. E.g. Automobiles, cigarettes, etc. Pure Oligopoly: The firms sell homogenous or standardized goods. E.g. Steel, petrol, and aluminum
Classification of Oligopoly
?
?
?
Based on Collusion: Non-collusive Oligopoly: A market is said to be a non-collusive oligopoly when the members of the group compete with one another. E.g. Automobiles Collusive Oligopoly (Cartels): In collusive oligopoly, the members come to an understanding among themselves to promote their common interests. E.g. OPEC and cement
Oligopoly
• Characteristics Small number of large firms. Product differentiation may or may not exist High barriers to entry. • • • • • Examples Aviation Steel Aluminum Petrochemicals
Oligopoly
• The barriers to entry are:
• Scale economies • Patents • Technology • Name recognition
Oligopoly
• Management Challenges
– –
Strategic actions Anticipating Rival behavior
Oligopoly
• Equilibrium in an Oligopolistic Market
–
–
In perfect competition, monopoly, and monopolistic competition the producers did not have to consider a rival’s response when choosing output and price. In oligopoly the producers must consider the response of competitors when choosing output and price.
Oligopoly
• Equilibrium in an Oligopolistic Market
–
Defining Equilibrium • Firms doing the best they can and have no incentive to change their output or price • All firms assume competitors are taking rival decisions into account.
Collusions
?
?
Since the number of firms in Oligopoly are very few, whenever these few firms would collectively decide to dominate the market price, the situation is referred to as a collusion. Collusion is an agreement, usually secretive, which occurs between Oligopolistic firms to limit open competition by deceiving, misleading, or to obtain an objective forbidden by law typically by defrauding or gaining an unfair advantage. It is an agreement among firms to divide the market, set prices, or limit production.
Dilemma for Oligipolistic Pricing
• In some oligopoly markets, pricing behavior in time can create a predictable pricing environment and implied collusion may occur.
• In other oligopoly markets, the firms are very aggressive and collusion is not possible. (Eg. Coke and Pepsi) • Firms are reluctant to change price because of the likely response of their competitors.
• In this case prices tend to be relatively rigid.
The Kinked Demand Curve
Rs/Q
If the producer raises price & the & competitors don’t, the demand will be elastic. If the producer lowers price, the competitors will follow and the demand will be inelastic.
D
Quantity
MR
The Kinked Demand Curve
Rs/Q
So long as marginal cost is in the vertical region of the marginal revenue curve, price and output will remain constant.
MC’ P* MC
D
Q* MR
Quantity
Dilemma for Oligopolistic Pricing
Price Signaling & Price Leadership • Price Signaling
• Implicit collusion in which a firm announces a price increase in the hope that other firms will follow suit. • Price Leadership • Pattern of pricing in which one firm regularly announces price changes that other firms then match
The Dominant Firm Model
–
–
In some Oligopolistic markets, one large firm has a major share of total sales, and a group of smaller firms supplies the remainder of the market. The large firm might then act as the dominant firm, setting a price that maximized its own profits.
Cartels
• Characteristics 1) Explicit agreements to set output and price 2) May not include all firms
Cartels
Characteristics Most often international – Examples of successful cartels • OPEC • International Bauxite Association
–
Examples of unsuccessful cartels • Copper • Tin • Coffee • Tea • Cocoa
doc_438081040.ppt