Price and Output Determination Under Oligopoly Oligopoly is defined as the market structure in which there are a few sellers selling a homogeneous or differentiated products. Selling homogeneous products – pure oligopoly. Example : industries producing cement, steel, petrol, cooking gas, chemicals, aluminium and sugar. Selling differentiated products – differentiated oligopoly. Examples: Automobiles, TV sets, soft drinks, computers, cigarettes etc.2
FEATURES Few Sellers. Ability to set price. Homogeneous or distinctive product. Blockaded entry or exit. Interdependence. High cross elasticities. Constant struggle. Lack of uniformity. Lack of certainty. Price rigidity.
Kinked Demand CurveThe kinked demand curve or the average revenue curve is made ofRelatively elastic demand curveRelatively inelastic demand curveAt given price P, there is a kink at point K on the demand curve DD. DK is theelastic segment and KD is the inelastic segment of the curve. Here, the kink impliesan abrupt change in the slope of the demand curve. Before the kink the demandcurve is flatter, after the kink it becomes steeper.The kink leads to indeterminateness of the course of demand for the product of theseller. Raising the price would contract sales as demand tends to be elastic at thisstage. Lowering the price would imply an immediate retaliation from the rivals onaccount of close interdependence of price output movement in oligopolistic market.
The Kinked Demand Curve y Elastic D KPrice Inelastic D 0 x Quantity
If costs shift up slightly, but MC still intersectsMR in the vertical segment, there will be no change in price. y MC’ This price rigidity MC is seen in real world oligopoly markets.Price D 0 x MR Quantity
CARTELS Cartel is a type of collusive oligopoly, firms jointly fix a price and output policy through agreements. Joint Profit Maximization Cartel : In this the firms producing homogeneous products surrender their price and output decisions to a centralized cartel board in the industry The individual firms surrender their price & output decisions to this board . Board determines output quota for the firms, the price to be charged and distribution of industry profits. The central board thus acts as a single monopolist to maximise the joint profits of the oligopolistic industry.8
Assumptions: Only two firms A & B are assumed in the oligopolistic industry. Each firm is selling homogeneous products. Number of buyers is large The market demand curve is given and is known to the cartel. Cost curves are different but known to the cartel Price of the product determines the policy of the cartel Cartel aims at the joint profit maximization.9