oligo & mpolistic
DESCRIPTION
Monopoly and OligopolyTRANSCRIPT
Oligopoly & Monopolistic CompetitionOligopoly literally means a few sellersEach seller controls significant size of
marketProduct/ service could be (1)
differentiated/ (2) undifferentiatedEg:(1) Cars, TVs, paints; (2) Oil, Cement,
Decisions of every seller in the market matters
Interdependency of firms is key feature of oligopolistic industry
Some Examples of OligopolyTata, Leyland, Volvo, etc. ------
Caterpillar, Komatsu, BEML, etc -----
Hero Honda, Bajaj, TVS, Kinetic etc. in ---
Maruti, Tata, HM, Hyundai, Fiat, Honda, etc in--
Asian Paints, J&N, Berger, Goodlas Nerolac etc-
MRF, Ceat, Modi, JK Tyre, Goodyear, Apollo, Goodyear
Kelvinator, Godrej, Voltas, Videocon, LG in ---
Castrol, Servo, HP, Gulf, Shell, Mobil, etc in ----
Oligopoly Examples. …contd.Leela, Taj, Oberoi, Sheraton, Ramada, Hyat,
Centaur etc. in ------Videocon, Onida, LG, Samsung, Philips, Akai,
BPL, etc. in ------ACC, L&T, Nagarjuna, Ramco, Priya,Pepsi, Coca Cola, Thumbs Up, etc. in ----Bisleri, AuqaFina, Bailley, Ganga, etc in----The Hindu, Indian Express, HT, ToI etc. in ---Economic Times, Financial Exp., B.Std., etc
in--
Main FeaturesIt is in between the Monopoly and
Monopolistic market modelsEvery seller can exert significant influence
on marketIndeterminate demand curve; due to
dependency on rival’s reactionsBuyers keenly compare the price/ distinct
features of each seller’s product
Collusion and cartelsCollusion:explicit or implicit agreement between
existing firms to avoid or limit competition with one another
Cartel:It is a situation in which formal
agreements between firms are legally permitted e.g. OPEC
Collusion is difficult if….There are many firms in the industryThe product is not standardisedDD and cost conditions are changing
rapidlyThere are no barriers to entryFirms have surplus capacity
The kinked demand curve (1)
Q0
P0
Quantity
Rs.
Consider how a firm may perceive its demand curve under oligopoly.
It can observe the currentprice and output.
but must try to anticipaterival reactions to anyprice change.
Q0
P0
Quantity
Rs.
The kinked demand curve (2)
The firm may expect rivalsto respond if it reducesits price, as this will be seenas an aggressive move
… so demand in response to a price reduction is likely to be relatively inelastic
The demand curve will be steep below P0.
D
The kinked demand curve (3)
Q0
P0
Quantity
Rs.
D
…but for a price increaserivals are less likely to react,
so demand may be relatively elasticabove P0
so the firm perceivesthat it faces a kinkeddemand curve.
The kinked demand curve (4)
Q0
P0
Quantity
Rs.
D
Given this perception, thefirm sees that revenue willfall whether price is increasedor decreased,
so the best strategy is to keepprice at P0.
Price will tend to be stable,even in the face of an increase in marginal cost.
Game Theory: Some terms
Game: A situation in which intelligent decisions are always interdependent
Strategy: Game plan describing how a player will act or move in every conceivable situation
Dominant strategy: Here a player’s best strategy is independent of those chosen by others
Select Cases of PricingIf the product is undifferentiated, it becomes
indeterminate to guess/ predict price, as it depends on rivals’ reaction. But, it will be lesser than under monopoly.
With product differentiation, each seller can have some flexibility in varying price/ output
Normally, if there is a sudden rise in DD for one seller, he hesitates to raise price, since others will ignore it.
Likewise, if costs of one seller go down, he may not reduce price at once, as others may reduce more
Kinky Demand CurveIntroduced by Paul Sweezy, it deals with why
prices of products like steel at $28 per ton during 1901-16; again at $43 between 1922-33; Sulphur prices remained at $18 per ton between 1926-38 excepting 2-3 cents variation/ ton in two years.
Hints to draw Kinky DD CurveAR has a kink at the prevailing priceMR becomes discontinuous below the kinkIf MC passes through the Gap, holding price-
output constant is the best alternativeNew industry, in early stages, this model is useful
in shorter term.
Price LeadershipDominant Firm Intel’s 386 cut chips price from $152 to $99 in
1992 (till 1991, it was monopoly), AMD had to follow it
Barometric Price LeadershipOld, experienced & largest firm assumes the role of
a leader; protects the interests of other sellers. Others’ costs of production is considered before fixing price
Exploitative/ aggressive pr. LeadershipLargest firm acts as an aggressive leader, and
compels other firms to fix the same price as it fixes. Other firms must follow its price irrespective of cost conditions
Collusive OligopolyThe small number of firms can arrive at
tacit or formal agreement about price/ output.
Formal agreement is termed as a cartel Though some minor rivalry/ self interest
still persists, under the cartel, group interest is given prime importance. In case of a conflict of interests between the two, self interest is ignored.
OPEC CartelMembers of major oil producers (13, incl.
Iraq) formed in 1960)In 1975, OPEC accounted for 55% of world
oil output & 80% trade; now produces 30% of world output
Determination of oil price (meets at Vienna twice a year normally), own & control oil resources directly
Saudi Arabia is major player in the cartelThey are now operating in a $22-28 per
barrel price band, and vary output accordingly.
Venezuela strike pushes up price/ US-Iraq conflict affects the price (Jan/ 03)
Effects of OligopolyPossibility of restricted output/ high pricesEntry barriers make consumers pay higher
priceFirms will not be able to build/ operate at
optimum levels of productionSales promotional strategies waste
resourcesNeither liked by the players/ nor good for
consumers/ government as less tax collection.
Lower employment opportunities
Monopolistic CompetitionIt is a market which has many sellers
producing goods which are close substitutesProducts are similar but not identical.This means there is product differentiation-
real ( physical) or perceivedCollusion is unlikely as all players have
limited control over market supply and priceThis market can be treated as a set of
various monopolists competing with one another.
Entry is difficult; but not restricted
Some ExamplesNearly 40-50 brands of toilet soaps in IndiaAbout 20 Tooth pastes Number of convent schools in a cityOrganised textile industry Private Travel services (60-70) between two
citiesManufacturers of pesticides Domestic publishers (25-30) for leading
subjects of college texts/ guides/ note books
Price-Output DeterminationShort run:For a typical firmSame as the monopoly equilibrium for
profits/ losses (MC=MR, MC cuts MR from below)
There is scope for making supernormal profits in short run
In long run, the firms will be earning just normal profits, as some more firms can enter and output increases
In long run, AR/MR are downward sloping and AR is tangential to AC.
Group EquilibriumAn assumption made here is that there is
uniformity in costs and demand faced by various firms within a group.
Individual firm’s decisions are negligible; no retaliation by others
If a firm within a group develops a good that becomes popular, it enjoys huge profits in short run. Later, these are competed away and only normal profits result
Effects of Monopolistic Competition
Slightly lesser output than in perfect competition and higher price
Better variety exists here than in PCHuge selling costs, low benefit to consumerWeak/ inefficient firms are allowed to operateTransportation costs (each firm wishes to cater to
consumers spread across the country)It does not promote specialisation for firmsIt does not encourage standardization; hence low
capacity utilisation by all firms
SummaryOligopoly and Monopolistic models are closer
to realityBoth are not extreme models like Monopoly
and PCWhile entry is very difficult (but not
impossible) in oligopoly, it is relatively easier in monopolistic competition.
Efficiency is better in oligopoly than under monopolistic competition.