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Oligopoly

The document provides information about oligopolies including: 1) An oligopoly is a market structure dominated by a few firms that each have influence over one another through pricing decisions and output levels. 2) Barriers to entry prevent new firms from entering the industry allowing existing firms to potentially earn long-term super-normal profits. 3) Firms engage in non-price competition like advertising and services rather than price competition to avoid price wars. 4) Predicting pricing behavior is impossible due to the uncertainty around how firms will react to competitors' price changes.

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Lemar B Conde
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306 views16 pages

Oligopoly

The document provides information about oligopolies including: 1) An oligopoly is a market structure dominated by a few firms that each have influence over one another through pricing decisions and output levels. 2) Barriers to entry prevent new firms from entering the industry allowing existing firms to potentially earn long-term super-normal profits. 3) Firms engage in non-price competition like advertising and services rather than price competition to avoid price wars. 4) Predicting pricing behavior is impossible due to the uncertainty around how firms will react to competitors' price changes.

Uploaded by

Lemar B Conde
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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History and Background

The word Oligopoly is derived from two Greek


words:
OLIGI meaning few
POLEIN meaning to sell
An Oligopoly market situation is also called
competition among the few.
Definition

• Dominated by a few firms

• Sells homogeneous OR differentiated


products

• Every seller influences the behavior of the


other firms and other firms influence it
Characteristics

• Few firms • No uniqueness pattern of

• Barriers to Entry pricing behavior

• Non-price Competition • Indeterminateness of the

• Interdependence Demand Curve

• Nature of the Product

• Selling Cost
Few Firms

• Exact number of firms is undefined

• There is a severe competition since


each firm produces a significant
portion of the total output.
Barriers to Entry

• There are barriers to entry like patents, licenses,


control over crucial raw materials, etc.

• Can earn super-normal profits in the long run


with the presence of the barriers of entry.

• These barriers prevent the entry of new firms


into the industry.
Non-price Competition

• Firms try to avoid price competition due to the


fear of price wars

• Depends on non-price methods like advertising,


after sales services, warranties, etc.

• Ensures that firms can influence demand and


build brand recognition.
Interdependence

• There is a lot of interdependence among firms in an


oligopoly

• Each firm is affected by the price and output


decisions of rival firms.

• A firm takes into account the action and reaction of


its competing firms while determining its price and
output levels.
Nature of the Product

• Either homogeneous OR differentiated.


Selling Cost

• Selling costs are highly


important for competing
against rival firms for a larger
market share.
No Unique Pattern of Pricing Behavior

• Predicting the pattern of pricing behavior among


firms is IMPOSSIBLE.

• Some wants to act independently and earn


maximum profits and some also wants to cooperate
with rivals to remove uncertainty.

• Firms can compete OR collude with other firms


which can lead to different pricing situations.
Indeterminateness of the Demand Curve

It is IMPOSSIBLE to determine the demand curve of a


firm because:
– there is a huge interdependence among rivals

– there is uncertainty regarding the reaction of the rivals


• rivals can react in different ways when a firm changes its price and
that makes the demand curve indeterminate
Advantages of Oligopoly

• They may adopt a highly competitive strategy, in which case they can
generate similar benefits to more competitive market structures, such as
lower prices.

• May be dynamically efficient in terms of innovation, new product and


process development. The super-normal profits they generate may be
used to innovate, in which case the consumer may gain.

• Price stability may bring advantages to consumers and the macro-


economy because it helps consumers plan ahead and stabilizes their
expenditure, which may help stabilize the trade cycle.
Disadvantages of Oligopoly

• High concentration reduces consumer choice.

• Cartel-like behavior reduces competition and can lead to higher prices


and reduced output.

• Given the lack of competition, oligopolists may be free to engage in the


manipulation of consumer decision making.

• Firms can be prevented from entering a market because of


deliberate barriers to entry.

• There is a potential loss of economic welfare.

• Oligopolists may be allocatively and productively inefficient.


Any Questions?

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