OLIGOPOLY REFERS TO THE MARKET WHERE THERE ARE
A FEW SELLERS WHO SELL A PARTICULAR PRODUCT.
IF ALL THE FIRMS SELL HOMOGENEOUS PRODUCT, IT IS
KNOWN AS PURE OLIGOPOLY. BUT IF THE PRODUCT SOLD
BY VARIOUS FIRMS ARE SIMILAR, IT IS KNOWN
DIFFERENTIATED OLIGOPOLY.
FEATURES OF Oligopoly.
? A FEW SELLERS.
? INTERDEPENDENCE.
? INDETERMINATENESS.
? PRODUCT DIFFERENTIATION.
? SELLING COST.
? BARRIERS TO ENTRY.
OLIGOPOLY
COLLUSIVE
NON-
COLLUSIVE
UNDER COLLUSIVE OLIGOPOLY FIRMS IN THE MARKET REALIZE THAT
COMPETING WITH ONE ANOTHER ONLY GOES AGAINST THEIR INTEREST.
SO THEY ENTER INTO A TACIT AGREEMENT OR UNDERSTANDING TO
AVOID COMPETITION FOR COMMON INTEREST.
THIS CAN BE DONE THROUGH ;
A) ESTABLISHMENT OF CARTEL
B) PRICE LEADERSHIP.
CARTEL ARRANGEMENTS
• CONDITIONS THAT INFLUENCE THE FORMATION OF CARTELS
– SMALL NUMBER OF LARGE FIRMS IN THE INDUSTRY
– GEOGRAPHICAL PROXIMITY OF THE FIRMS
– HOMOGENEOUS PRODUCTS THAT DO NOT ALLOW
DIFFERENTIATION
– STAGE OF THE BUSINESS CYCLE
– DIFFICULT ENTRY INTO INDUSTRY
– UNIFORM COST CONDITIONS, USUALLY DEFINED BY PRODUCT
HOMOGENEITY
A)
CARTEL MAY BE PERFECT CARTEL UNDER WHICH THE CENTRL GOVERNING
BODY IS APPOINTED TO TAE THE COMMON DECISIONS WITH RESPECT TO
OUTPUT AND PRICE TO BE CHARGED SO AS TO MAXIMIZE THE TOTAL PROFIT
OF THE GROUP.
SECONDLY, THE FIRMS MAY ARRIVE AT THE AGREEMENT ON SHARING THE
MARKET AMONG THEMSELVES.
LET US SEE HOW A CARTEL TAKES DECISION WITH RESPECT TO OUTPUT & PRICE
D
D
1
MR
MC
1
MC
2
MC
3
?MC
Q
Q
1
Q
2
Q
3
O
OUTPUT
COST / REVENUE
P
B)
PRICE LEADERSHIP
ALL THE FIRMS IN THE GROUP HAS ONE PARTICULAR FIRM AS A
LEADER AND THE DECISION TAKEN BY THAT FIRM IS ACCEPTED BY OTHER
FIRMS.
THERE ARE DIFFERENT TYPES OF LEADERSHIP;
A) LEADERSHIP BY THE DOMINENT FIRM
B) BAROMETRIC LEADERSHIP
C) AGGRESSIVE LEADERSHIP
D
D’
S
F
S
F
’
AR
L
MR
L
O OUTPUT
PRICE
MC
L
Q
L
P
OUTPUT SUPPLIED BY THE REST
PRICING UNDER DOMINENT LEADERSHIP
O OUTPUT
D
AR
AC
L
MC
L
AC
F
MC
F
MR
P
F
P
PRICE
o
output
Cost/Revenue
AR
MR
MC
1
MC
2
MC3
KINKED DEMAND CURVE
A FEW SELLERS ONLY MEANS THAT THE NUMBER OF FIRMS IN THE
GROUP IS SO SMALL THAT THE DECISION TAKEN BY ANY INDIVIDUAL FIRM CAN
INFLUENCE THE MARKET.
THEREFORE, A FIRM OPERATING IN OLIGOPOLY HAS TO CONSIDER NOT
ONLY THE EFFECT OF HIS RIVAL’S ACTION ON HIS FIRM , BUT ALSO THE EFFECT
OF ITS OWN ACTION ON HIS RIVAL, HIS REACTION AND ITS EFFECT ON HIS
BUSINESS.
doc_500342014.pptx
A FEW SELLERS WHO SELL A PARTICULAR PRODUCT.
IF ALL THE FIRMS SELL HOMOGENEOUS PRODUCT, IT IS
KNOWN AS PURE OLIGOPOLY. BUT IF THE PRODUCT SOLD
BY VARIOUS FIRMS ARE SIMILAR, IT IS KNOWN
DIFFERENTIATED OLIGOPOLY.
FEATURES OF Oligopoly.
? A FEW SELLERS.
? INTERDEPENDENCE.
? INDETERMINATENESS.
? PRODUCT DIFFERENTIATION.
? SELLING COST.
? BARRIERS TO ENTRY.
OLIGOPOLY
COLLUSIVE
NON-
COLLUSIVE
UNDER COLLUSIVE OLIGOPOLY FIRMS IN THE MARKET REALIZE THAT
COMPETING WITH ONE ANOTHER ONLY GOES AGAINST THEIR INTEREST.
SO THEY ENTER INTO A TACIT AGREEMENT OR UNDERSTANDING TO
AVOID COMPETITION FOR COMMON INTEREST.
THIS CAN BE DONE THROUGH ;
A) ESTABLISHMENT OF CARTEL
B) PRICE LEADERSHIP.
CARTEL ARRANGEMENTS
• CONDITIONS THAT INFLUENCE THE FORMATION OF CARTELS
– SMALL NUMBER OF LARGE FIRMS IN THE INDUSTRY
– GEOGRAPHICAL PROXIMITY OF THE FIRMS
– HOMOGENEOUS PRODUCTS THAT DO NOT ALLOW
DIFFERENTIATION
– STAGE OF THE BUSINESS CYCLE
– DIFFICULT ENTRY INTO INDUSTRY
– UNIFORM COST CONDITIONS, USUALLY DEFINED BY PRODUCT
HOMOGENEITY
A)
CARTEL MAY BE PERFECT CARTEL UNDER WHICH THE CENTRL GOVERNING
BODY IS APPOINTED TO TAE THE COMMON DECISIONS WITH RESPECT TO
OUTPUT AND PRICE TO BE CHARGED SO AS TO MAXIMIZE THE TOTAL PROFIT
OF THE GROUP.
SECONDLY, THE FIRMS MAY ARRIVE AT THE AGREEMENT ON SHARING THE
MARKET AMONG THEMSELVES.
LET US SEE HOW A CARTEL TAKES DECISION WITH RESPECT TO OUTPUT & PRICE
D
D
1
MR
MC
1
MC
2
MC
3
?MC
Q
Q
1
Q
2
Q
3
O
OUTPUT
COST / REVENUE
P
B)
PRICE LEADERSHIP
ALL THE FIRMS IN THE GROUP HAS ONE PARTICULAR FIRM AS A
LEADER AND THE DECISION TAKEN BY THAT FIRM IS ACCEPTED BY OTHER
FIRMS.
THERE ARE DIFFERENT TYPES OF LEADERSHIP;
A) LEADERSHIP BY THE DOMINENT FIRM
B) BAROMETRIC LEADERSHIP
C) AGGRESSIVE LEADERSHIP
D
D’
S
F
S
F
’
AR
L
MR
L
O OUTPUT
PRICE
MC
L
Q
L
P
OUTPUT SUPPLIED BY THE REST
PRICING UNDER DOMINENT LEADERSHIP
O OUTPUT
D
AR
AC
L
MC
L
AC
F
MC
F
MR
P
F
P
PRICE
o
output
Cost/Revenue
AR
MR
MC
1
MC
2
MC3
KINKED DEMAND CURVE
A FEW SELLERS ONLY MEANS THAT THE NUMBER OF FIRMS IN THE
GROUP IS SO SMALL THAT THE DECISION TAKEN BY ANY INDIVIDUAL FIRM CAN
INFLUENCE THE MARKET.
THEREFORE, A FIRM OPERATING IN OLIGOPOLY HAS TO CONSIDER NOT
ONLY THE EFFECT OF HIS RIVAL’S ACTION ON HIS FIRM , BUT ALSO THE EFFECT
OF ITS OWN ACTION ON HIS RIVAL, HIS REACTION AND ITS EFFECT ON HIS
BUSINESS.
doc_500342014.pptx