final oligopoly

8/13/2019 Final Oligopoly

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Oligopoly

Oligopoly is a situation where a few large firms

compete against each other and there is an element

of interdependence in the decision-making of these

firms.

It is a competition among FEW BIG SELLERS

each one of them selling either homogenous or

differentiate products.

Examples- Automobiles, Steel, Internet service

providers


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Features

A few sellers Lack of uniformity

Homogenous or Differentiated Product

Advertisement Elements of Monopoly

Constant Struggle

Interdependence

Existence of the Price Rigidity

Uncertainty

Existence of Non-Profit Motive


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Reasons for the Emergence Of Oligopoly

1. Large Capital

2. Patent Rights

3. Essential Factors

4. Economies of Scale

5. Entrepreneurship

6. Mergers


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OLIGOPOLY MODELS

The CournotsDuopoly Model

Sweezy Kinked-Demand Theory Model

Price Leadership Model

Collusive Pricing Model

The Game Theory Model

Prisoners Dilemma Model


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CournotsDuopoly

It is a market with two sellers exercising

control over the supply of commodities.

There are 2 firms

Both operate at zero cost

Both face demand curve with constant

negative slope

Each acts that the other will not react to his

decision to change output or price


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Price Leadership Model

Low cost firm price Leadership

Dominant firm price leadership

Barometric price leadership

A large dominant firm with lower costs that it

competitors becomes the price maker.

The dominant firm sets price and its quantity

based upon residual demand and this determines

the price for competitive firms and their supply.


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The Game Theory

We have knowledge of the players, the likelystrategies & related payoffs

Each game tries to attain Nash equilibrium.

A Nash equilibrium in prices; a set of pricessuch that no firm can obtain a higher profit

by choosing a different price if the other

firms continue to charge these prices. There may be more than one Nash

equilibrium


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Kinked Demand Curve Model

Show a situation where the best situation forplayers is to maintain current prices and that prices

remain stable in spite of firms with different cost

structures. Asymmetry in price movements:

o If firm raises price, no one follows, therefore

quantity demanded is elastic.

o If firm lowers price, all follow suit so the

quantity demanded is quite inelastic.


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Marginal revenue curve is discontinuous and

allows for various marginal cost curves.


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Kinked Demand Curve

If the firm raises its

price above P, it facesan elastic demandcurve, payoff low

If the firm lowers itsprice below P, it faces

an inelastic demandcurve, payoff low


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Kinked Demand Curve

Different firms can havedifferent MCs. As longas they fall with in thediscontinuous MR, P willremain stable.

Output Effect < PriceEffect for pricemovements with thediscontinuous MRcurve.

If MCincreases enough,all firms raise theirprices and the kinkvanishes.

Oli l M d l C ll i


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Oligopoly Models Collusive

Pricing

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.


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CartelsA cartelis an organization of

independent firms whose purpose is

to control and limit production andmaintain or increase prices andprofits.

Like collusion, cartels are illegal in theUnited States.


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Conditions necessary for a cartel to be

stable (maintainable):

There are few firms in the industry.

There are significant barriers to entry.

An identical product is produced.

There are few opportunities to keepactions secret.

There are no legal barriers to sharing

agreements.


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Unique About Oligopoly

What is unique about firms inoligopolies is that they tend not to

raise or lower prices, because at

higher prices demand is elastic and atlower prices demand is inelastic-

raising or lowering prices would result

in revenue losses. As a result, mc canincrease or decrease without affecting

the profit- maximizing price and output

level.


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Thank You

final oligopoly

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