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OLIGOPOLY

An oligopoly is a market structure with few firms selling either homogeneous or differentiated products. There are typically 3-5 firms in an oligopoly. The actions of one firm are likely to affect the others. Price determination in an oligopoly can follow Sweezy's kinked demand curve model, where firms will match price cuts but not price increases to avoid losing customers. Firms may also engage in collusive behavior like setting joint prices or market shares through explicit or tacit agreements to maximize collective profits. Examples of oligopolies include industries like aluminum, cement, and automobiles.

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Shweta Shrivastava
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247 views

OLIGOPOLY

An oligopoly is a market structure with few firms selling either homogeneous or differentiated products. There are typically 3-5 firms in an oligopoly. The actions of one firm are likely to affect the others. Price determination in an oligopoly can follow Sweezy's kinked demand curve model, where firms will match price cuts but not price increases to avoid losing customers. Firms may also engage in collusive behavior like setting joint prices or market shares through explicit or tacit agreements to maximize collective profits. Examples of oligopolies include industries like aluminum, cement, and automobiles.

Uploaded by

Shweta Shrivastava
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPT, PDF, TXT or read online on Scribd
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OLIGOPOLY

OLIGOPOLY is the market situation in which

there are few firms selling homogeneous or differentiated product Difficult to pin point the nos. of firms it may be 3,4 or 5. Few firms action of one likely to effect the other. Produces homo. OR hetro. OR can be said perfect oligopoly or differer. Oligopoly.

EXAMPLE
PERFECT OLIGOPOLY

Alumunium Cement Copper Steel DIFFERENTIATED OLIGOPOLY Automobiles ciggrettes soaps & detergent

PRICE DETERMINATION UNDER OLIGOPOLY


THE SWEEZY MODEL OF KINKED DEMAND -

CURVE {RIGID PRICE} Published article in 1939 by professor SWEEZY. Presented the kinked D curve analysed to explain price rigidities observed in oligopolistic market SWEEZY assume 1st if firm lower its price rivals will also react the same to avoid losing the customer THUS not compete with demand & thus relatively inelastic.

2nd CONDITION If price increases

rivals will not follow low demand & thus relatively elastic IF these two situation occur , the demand curve of the oligopoly firm has a kink at the prevailing market price which explain price rigidity.

ASSUMPTIONS
- Product is close substitute - Same quality no product differ. - Few firms - No advertisement expenditure - Established or prevailing market price for the product at which all sellers are satisfied - Sellers attitude depend on the attitude of the rivals - Any step of + OR the price will be counteracted by the other seller who will follow his move.

THE MODEL
KPD = KINKED DEMAND PRICE OP = the price prevailing in the market OR = product of one seller Starting from point P Any increases in P above P will reduces his sales Any rival will not follow his P increases Kp is elastic and the corresponding portion Ka of the MR curve is POSITIVE Any increase in P will not reduce his total sale but also his TR or PROFIT

IF seller reduces the P of the product below P

i.e. OPO his rival will reduce his price Though he will increases his sales but his profit would be less than before Reason PD portion of kinked D curve below P is less elastic & the corresponding part of MR curve below R is negative Thus in both P raising or reducing seller will be a loser He would stick to the prevailing market price OPO which remain rigid

2. COLLUSIVE OLIGOPOLY
Situation in which

Firms joint particular industry


Single unit for maximising their joint profit Negotiate themselves for their sharing in the

market

Joint profit Maximisation Cartel.

Market sharing cartel

There is another type of collusion known as the

leadership based on tacit agreement In this one firm acts as price leader& fixes the price & other firm follow it THERE ARE 3 TYPES OF FIRM

LOW COST FIRM DOMINANT FIRM BAROMETRIC FIRM

CARTELS
Association of independent firm in same industry

Common policies
Voluntary OR compulsory Open OR secret depend on govt. policies TYPES OF CARTEL

JPM OR PERFECT CARTEL

MARKET SHARING CARTEL

JOINT PROFIT MAXIMI.


The uncertainity to be found in an oligopoly market

provides an incentives to rival firms to form a perfect cartel P.c. is an extreme form of perfect collusion Firms priducing a homogenous product form a centralised cartel board in the industry. The individual firm surrender their price output decision to this central board. The board determines Output quotas for its members , the P to be charged & the distribution of industry profit Since board manipulates P , O,S ,& DIS. Of profit AND thus act as single monopoly

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