Strategic Resources May 2024 Corporate Presentation
Oligopoly
1.
2. oligopoly
The term oligopoly is derived from two Greek words,
Oleg’s and 'Pollen‘.
oligopoly is a kind of imperfect market where there are
a few firm in the market.
Oligopolistic competition can give rise to a wide range
of different outcomes,like the firms may employ
restrictive trade practices (collusion, market sharing
etc.)
Oligopoly theory makes heavy use of game theory to
model the behavior of oligopolies:
3. Kinds of oligopoly
Pure oligopoly – have a homogenous product. Pure
because the only source of market power is lack of
competition.
An example steel industry, petrolium,
Impure oligopoly – have a differentiated product.
Impure because have both lack of competition and
product differentiation as sources of market power.
An example automobile industry,
4. Characteristics Profit maximization conditions
An oligopoly maximizes profits by producing
where marginal revenue equals marginal costs,
Ability to set price
Oligopolies are price setters rather than price takers.
Entry and exit
Barriers to entry and set up of new industries is high.
Number of firms
There are so few firms that the actions of one firm can
influence the actions of the other firms.
5. Long run profits
High barriers of entry prevent sideline firms from
entering market to capture excess profits.
Product differentiation
Product may be homogeneous (steel) or differentiated
(automobiles.
Interdependence
Oligopolies are typically composed of a few large
firms. Each firm is so large that its actions affect
market conditions.
Non-Price Competition
Oligopolies tend to compete on terms other than
price. Loyalty schemes, advertisement, and product
differentiation are all examples
6. Modeling
Dominant firm model,
The single firm that controls a dominant share of
the market and a group of smaller firms.
Cournot-Nash model,
The model assumes that there are two “equally
positioned firms”; the firms compete on the basis of
quantity rather than price and each firm makes an
“output decision assuming that the other firm’s
behavior is fixed.” The market demand curve is
assumed to be linear and marginal costs are constant.
7. Bertrand model
The Bertrand model is essentially the Cournot-Nash
model except the strategic variable is price rather than
quantity
kinked demand model
the best option for the
oligopolist is to produce at
point E which is the equilibrium
point and the kink point.
This is a theoretical model
proposed in 1947, which has
failed to receive conclusive
evidence for support.
8. Game Theory
Game theory is an attempt to model and understand
behavior given the presence of interdependence
Games have the following characteristics:
Rules
Strategies
Payoffs
Outcome
