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    Oligopoly

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    Oligopoly

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    Oligopoly

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    Jwaala N

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    of 12

    Lecture 37

    OLIGOPOLY

    Lecturer,
    Gopika.P.G
    What Is an Oligopoly?
    • An oligopoly is a type of market structure that exists within an
    economy.
    • In an oligopoly, there is a small number of firms that control the
    market. A key characteristic of an oligopoly is that none of these
    firms can keep the others from having significant influence over
    the market. The concentration ratio measures the market
    share of the largest firms.
    • There is no precise upper limit to the number of firms in an
    oligopoly, but the number must be low enough that the actions of
    one firm significantly influence the others. An oligopoly is
    different from a monopoly, which is a market with only one
    producer.
    Oligopoly Characteristics

    • Price-fixing - Price-fixing is the act of setting prices, rather than


    letting them be determined by the free-market forces.
    • Another approach is for firms to follow a recognized price
    leader so that when the leader raises prices, the others will
    follow.
    • The conditions that enable oligopolies to exist include high entry
    costs in capital expenditures, legal privilege (license to use
    wireless spectrum or land for railroads), and a platform that
    gains value with more customers, such as social media.
    Oligopoly Characteristics

    • Price-fixing - Price-fixing is the act of setting prices, rather than


    letting them be determined by the free-market forces.
    • Another approach is for firms to follow a recognized price
    leader so that when the leader raises prices, the others will
    follow.
    • The conditions that enable oligopolies to exist include high entry
    costs in capital expenditures, legal privilege (license to use
    wireless spectrum or land for railroads), and a platform that
    gains value with more customers, such as social media.
    What Is an Example of a Current
    Oligopoly?
    • One measure that shows if an oligopoly is present is the
    concentration ratio, which calculates the size of companies in
    comparison to their industry. Instances where a high
    concentration ratio is present include mass media. In the U.S.,
    for example, the sector is dominated by just five companies:
    NBC Universal; Walt Disney; Time Warner; Viacom CBS;
    and News Corporation—even as streaming services like
    Netflix and Amazon Prime begin to encroach on this market.
    Meanwhile, within big tech, two companies control smartphone
    operating systems: Google Android and Apple iOS.
    Types of Oligopoly

    Pure Oligopoly or Perfect Oligopoly : occurs when the product is


    homogeneous in nature, e.g. Aluminum industry. This type of oligopoly
    tends to process raw materials or produce intermediate goods that are
    used as inputs by other industries. Notable examples are petroleum,
    steel and aluminum. Differentiated or imperfect oligopoly occurs when
    goods sold is based on product differentiation, e.g. Talcum powder .
    Open and Closed Oligopoly : In an open oligopoly market new firms
    can enter the market and compete with the existing firms. But, in
    closed oligopoly entry is restricted .
    • Collusive and Competitive Oligopoly : When few firms of the
    oligopoly market come to a common understanding or collusion with
    each other either in fixing price or output or firms. If they compete
    with each other ,it is called competitive oligopoly.
    • Partial or Full Oligopoly : Oligopoly is partial when the industry is
    dominated by one large firm which is considered or looked upon as
    the leader of the group .The dominating firm will be the price leader.
    In full oligopoly , the market will be conspicuous by the absence of
    price leadership.
    • Syndicated and Organized Oligopoly : Syndicated oligopoly refers to
    that situation where the firms sell their products through centralized
    syndicate ,
    Organized oligopoly refers to the situation where the firms organize
    themselves into a central association for fixing prices output, quotas
    ,etc. .
    Price and Output
    • An oligopolistic firm has to behave strategically when it makes a decision
    about its price.
    • It has to consider whether rival firms will keep their prices and quantities
    constant, when it makes changes in its price and quantity.
    • When an oligopolistic firm changes its price , its rival firms will retaliate or
    react and change their prices which in turn would affect the demand of the
    former firm .Therefore , an oligopolistic firm cannot have sure and
    determinate demand curve, since the demand curve keeps shifting as the
    rivals change their prices in reaction to the price changes made by it .
    • Now when an oligopolistic does not know his demand curve, what price and
    output he will fix cannot be ascertained by economic analysis.
    Kinked demand curve
    ❑ By P. Sweezy in 1939
    ❑ He introduced the kinked demand curve as an operational tool for the
    determination of the equilibrium in oligopolistic markets.
    ❑ The demand curve for a oligopolist has a kink which reflects the
    behavior of firms.
    ❑ Hall & Hitch in their famous article ‘price theory and business
    behaviour ‘ explained earlier.
    ABOVE THE KINK BELOW THE KINK

    Elastic demand curve Inelastic demand curve

    Here the degree of responsiveness


    Here people will react more is less.
    proportionately to a price
    exchange.
    Thus a price hike can cause huge Thus a price reduction cannot
    reduction in demand so firms increase the demand much so
    prefer to have price reduction . firms increase the price.
    Firms reduces the price and Firms hike the price and reach at
    reaches at the kink. the kink.
    At the point of kink there are :
    ❑ Price rigidity : due to difference in elasticities .
    ❑ Quantity rigidity : due to discontinuous MR curve .
    Point left to the kink : MR > MC.
    Points right to the kink : MR < MC .
    At the kink : profit maximizing points
    ❑ The rigidity in price leads the firm to give more importance to non-
    price competition .
    ❑ The kinked demand curve is not used as a tool of analysis for the
    determination of the price and output in oligopolistic markets, but to
    explain why the price , once determined will remain sticky.
    Not a theory of pricing .

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