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Oligopoly– characteristics
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Oligopoly– characteristics

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  • 1. OLIGOPOLY
    • DEFINITION:
    • 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
    • ASSUMPTIONS OF COURNOT’S MODEL OF 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.
  • 11. MAIN FEATURES OF OLIGOPOLY
    • 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.