• Like
Oligopoly– characteristics
Upcoming SlideShare
Loading in...5

Oligopoly– characteristics

Uploaded on


  • Full Name Full Name Comment goes here.
    Are you sure you want to
    Your message goes here
    Be the first to comment
No Downloads


Total Views
On Slideshare
From Embeds
Number of Embeds



Embeds 0

No embeds

Report content

Flagged as inappropriate Flag as inappropriate
Flag as inappropriate

Select your reason for flagging this presentation as inappropriate.

    No notes for slide
  • 24
  • 25
  • 109


    • 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.
  • 2. Oligopoly – Characteristics
    • Small number of firms
    • Product differentiation may or may not exist
    • Barriers to entry
      • Scale economies
      • Patents
      • Technology
      • Name recognition
      • Strategic action
  • 3. Oligopoly
    • Examples
      • Automobiles
      • Steel
      • Aluminum
      • Petrochemicals
      • Electrical equipment
  • 4. DUOPOLY
    • There are two independent sellers, each producing and selling the homogeneous product
    • The cost of production of the two sellers is identical
    • Each seller aims at maximizing profits
    • The number of buyers is large
    • Each firm has a complete knowledge about the demand conditions of its product.
    • Each firm decides about its output under the assumption that his rival will not change his output.
    • The duopolist accepts the price at which he can sell his total output.
  • 5. Cournot Model
    • Adjustment process
      • Entry by Firm B reduces the demand for Firm A’s product
      • Firm A reacts by reducing output, which increases demand for Firm B’s product
      • Firm B reacts by increasing output, which reduces demand for Firm A’s product
      • Firm A then reduces output further
      • This continues until equilibrium is attained
  • 6. The Model
    • Firm A first enters the market
    • The equilibrium of firm A would be reached where MR=MC, as the firm is operating with zero production cost, the marginal cost will zero.
    • Thus, equilibrium of the firm would be where MR A would touch zero, i.e., at a point X on the X axis.
    • At X it produces OX (=1/2 OD) units of output and sells it at OP A price.
  • 7.
    • Firm B, is a late starter, finds the firm A to supply half of the output i.e., OX output, so it can serve only the remaining market.
    • B assumes that A will supply OX output, B considers it demand curve to be KD and the corresponding marginal revenue curve MR B .
    • B produces XY quantity (=1/2 XD) and sells of OP B .
    • Thus B supplies ¼ of the demand.
    • Thus A supplies ½ of the demand and the B supplies ¼ of the demand.
  • 8.
    • Now firm A assumes that firm B will keep on supplying only ¼th of the market, it considers the rest of the market (=3/4 th of the total demand) to be his domain.
    • So in the next period firm A will supply ½ x ¾ = 3/8 of the total market.
    • On a similar assumption, in the next period firm B will supply ½ x (1 - 3/8) = 5/16 of the total demand.
  • 9.
    • In this manner, A’s output will be decreasing and B’s output will be increasing in each successive period.
    • Such an action-reaction pattern will continue until eventually each of the two firms will settle for supplying 1/3 rd of the total market.
    • Thus, the two profit-maximizing firms will together meet only two-thirds of the total demand; the remaining one-third of the demand will stay unsatisfied.
  • 10. Shortcoming of Cournot Model
    • The firms do not learn from their past misjudgments
    • There is no possibility of entry
    • Fails to specify the time taken for the adjustment process
    • In this the competition is basically quantity competition not price competition. This cannot be said to hold true generally.
    • Small number of large sellers
    • Interdependence
    • Existence of price rigidity
    • Presence of monopoly element
    • Advertising
  • 12. The Kinked Demand Curve $/Q MR Quantity D P* Q* MC MC ’ So long as marginal cost is in the vertical region of the marginal revenue curve, price and output will remain constant.
  • 13. Cartels or Collusions
    • Centralized Cartels
    • Market-sharing Cartel
    • Business syndicates or truss may be formed by the competing firms and agree to charge a uniform price, thereby eliminating price competition. Such collusion implies conversions of an oligopoly into a monopoly. Business collusion is considered illegal under anti-trust laws, such as the Competition Act, 2002, in India.
  • 14. Kinds of price leadership
    • Dominant-firm price leadership
    • Barometric price leadership
  • 15. Dominant-firm price leadership
    • This model rests on the assumption that the oligopoly industry is composed of one large firm together with many small firms.
    • The dominant fixes the prices and the small firms act as price-takers
    • This is also known as partial monopoly
    • At this fixed price all the firms can sell what ever amount they can.
  • 16. Barometric price leadership
    • One firm acts as a ‘barometer’, reflecting changing market conditions or costs of production that require a change in price.