OLIGOPOLY

LEARNING OBJECTIVES Definition Types of oligopoly Models of oligopoly Assumptions of the models Equilibrium condition Short run oligopoly Long run oligopoly

DEFINITION An oligopoly is a market structure in

which there are 3-11 sellers and many buyers

Types of commodities are both homogenous and heterogeneous

ASSUMPTIONS Few sellers Barriers to entry

Economies of scaleLegal restrictionsBrand namesControl over an essential resourceHigh cost of entryStart-up costs; advertising

Crowding out the competition

TYPES OF OLIGOPOLY (W.R.T GOODS)

Oligopoly

puredifferentiate

d

TYPES OF OLIGOPOLY (W.R.T GOODS) PURE OLIGOPOLY: the products are all

homogenous i.e the companies are making same product.

Example is of sugar and edible oil manufacturers.

Example OPEC: Oil producing countries DIFFERENTIATED OLIGOPOLY: if the

products of the companies are heterogeneous

Heterogeneous production refers to a firm having various product lines.

Example Service shoes have other product lines besides being a shoe manufacturer.

Leather jacket companies also have various spin of products such as leather bags, belts etc.

TYPES OF OLIGOPOLY( W.R.T CATEGORY)

Oligopoly

collusiveNon-

collusive

COLLUSIVE OLIGOPOLY oligopoly in which two or more than two

firms are making an agreement or determination of price and output.

Supply is curtailed so that the price does not go low.

TYPES OF COLLUSIVE OLIGOPOLY

Collusive oligopoly

cartel

Profit sharing

Market sharing

Price leadership

CARTEL

In which two or more than two firms are making an agreement on determination of price and output

Shortest way of controlling/earning profit by controlling the supply.

CARTEL AS A MONOPOLIST

Quantity per periodQ0

MC

D

MR

p

Dolla

rs p

er

unit

c

CARTEL AS A MONOPOLIST

A cartel acts as a monopolist.

Here, D is the market demand curve, MR the associated marginal revenue curve, and MC the horizontal sum of the marginal cost curves of cartel members (assuming all firms in the market join the cartel).

Cartel profits are maximized when the industry produces quantity Q and charges price p.

EXAMPLES OF CARTELS

Example of Walls and Olpers products. Olpers has come up with a new product of

Omore ice cream which is giving tough competition to Walls ice cream

Result is a 30%-40% decrease in the profits of Walls within a period of 6 months.

PROFIT SHARING CARTEL Collusive pricing model reveals that firms in the

market agree on production limits and set a common price to maximize the joint profit.

When firms collude and agree on common price so mostly they earn Economic profit.

It is assumed here that firms have identical cost data and same demand and thus Marginal revenue data.

DIFFICULTIES IN COLLUSION Collusion among Corporations is difficult

because of;

Demand and Cost Differences among Seller The Complexity of Output Coordination among

Producers The Potential for Cheating The Potential Entry of New Firms

MARKET SHARING CARTEL Gives each member the right to operate

in a particular geographic area.

Most notorious example of this cartel: Du pont and Imperial chemicals

agreeing to divide market.

PRICE LEADERSHIP The firms in the Oligopolistic industry without any

formal agreement accept the price set by the leading firm in the industry and move their prices in line with the prices of the leader firm.

Price Leadership can be in any of the forms;

Price Leadership by a Dominant firm Barometric Price Leadership Aggressive or Exploitative Price Leadership

EQUILIBRIUM UNDER PRICE LEADERSHIP

MR 0

MC a

MC b

A B

X Y

Rev

enue

/ Cos

t/P

rice

s

Output

NON COLLUSIVE OLIGOPOLY That oligopoly in which two or more firms

are making an independent decision about their price and output determination, keeping in view the reaction of other firms operating in the market.

One firm’s action effects other firm’s profit The response is to be kept under considered

during the competition analysis because say if the supply by all the firms exceeds demand the price would go down and adversely affect all the firms in the market.

MODELS IN NON-COLLUSIVE OLIGOPOLY

Cournot Model

Bertrand model

Chamberlin model

Kinked Sweezy model

Stackleberg model

COURNOT MODEL

Cournot model: if one firm is predicting about the other firm’s price, then the first firm can make erudite decisions about the price of its own product.

HOW TO DETERMINE THE PRICE?

Price Determination Depends:

Nature of Goods

Technology

Elasticity of Demand

Marketing Strategy

Price of Inputs(Factors of Production)

IN ORDER TO CREATE THE DEMAND OR PRODUCT:

buy 1 get 1 free offers

Lucky draw

Discount sales

Customer incentives

BERTRAND MODEL

one firm can predict the output of other firms and taking this information into account the level of output to be produced can be determined.

Prediction made through analyzing the technology used, scale of production, raw material and market share.

CHAMBERLIN MODEL

Cournot model

Bertrand mod

el

Chamberlin model

KINKED SWEEZY MODEL It is practiced application of Chamberlin model.

It was introduced by Paul Sweezy in 1939.

Kinked seewzy model: is basically the practical implementation of the preceding 3 models

It is assumed that: the firms are independent and are not engaged in any collusive

pricing. The price and output in the market is given. The kink or bending position of demand curve is formed at

prevailing market price.

KINKED SWEEZY MODEL Corporations may follow price changes or

may ignore it.

If rivals match price changes so demand curve will be Less Elastic for the firm while if rivals ignore price changes so Demand curve will be more Elastic.

It has taken the information about the price and output of two firms and used an empirical research to prove that the demand curve for both the firms would be kinked.

NORMAL TREND

D1

MR1

Quantity

Pri

ce

The rivals Match price changes

KINKED SWEEZY MODEL

MR2D1

D2

MR1Quantity

The rivals Ignore price changes

Pri

ce

KINKED SWEEZY MODEL

MR2

D2

Quantity

Pri

ce

KINKED SWEEZY MODEL

D

Quantity

Effectively creatinga kinked demand curve

Pri

ce

EQUILIBRIUM UNDER “KINKED-DEMAND CURVE”

D

MR cuts MC from below

P

rice

MC2

MC1

Quantity

PERSONAL OPINIONS ON OLIGOPOLY

Zuhaib Gull

Farwah Iqbal

THE END

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