OLIGOPOLY

Learning Objectives
 Definition
 Types of oligopoly
 Models of oligopoly
 Assumptions of the models
 Equilibrium condition
 Short run oligopoly
 Long run oligopoly

Definition
 Anoligopoly is a market structure in which
there are 3-11 sellers and many buyers
 Typesof commodities are both homogenous
and heterogeneous

ASSUMPTIONS
 Few sellers
 Barriers to entry
 Economies of scale
 Legal restrictions
 Brand names
 Control over an essential resource
 High cost of entry
 Start-up costs; advertising
 Crowding out the competition

TYPES OF OLIGOPOLY (w.r.t goods)

TYPES OF OLIGOPOLY (w.r.t goods)
 PURE OLIGOPOLY: the products are all
homogenous i.ethe 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)

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

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
MC
p
Dollars per unit
c
D
MR
Quantity per period
0 Q

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
 Collusivepricing 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.
 Itis 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
 Giveseach 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;
 PriceLeadership by a Dominant firm
 Barometric Price Leadership
 Aggressive or Exploitative Price Leadership

Equilibrium under Price Leadership
MC b
Revenue/ Cost/
B
MC a
Prices
A
MR
0 Y X 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)

 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

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.
 Ifrivals 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.
 Ithas 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
The rivals Match price
changes
Price
D1
Quantity
MR1

KINKED SWEEZY MODEL
The rivals Ignore price
changes
Price
D2
MR2
D1
Quantity MR1

Kinked sweezy model
Price
D2
M
R2
Quantity

Kinked sweezy model
Effectively creating
a kinked demand curve
Pric
e
D
Quantity

Equilibrium under “Kinked-
Demand Curve”
MR cuts MC from below
MC1
Price
MC2
D
Quantity

Personal Opinions On Oligopoly
 Zuhaib Gull
 Farwah Iqbal

The End

Thank You