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OLIGOPOLY

Presented by:

Mr Stephen A. Silverio
Mr Noel
Ms Emer Villa
OLIGOPOLY

 derived from the from the Greek word oligos


means “little, small, few” and  pōlein means “to
sell”
 Duopoly - If there are only two sellers.
 A form of industry (market) structure
characterized by a small number of large firms
that dominate the market, selling either
identical or differentiated products, with
significant barriers to entry into the industry.
OLIGOPOLY

 Relative size and extent of market control


means that interdependence among firms in
an industry is a key feature of this market
structure.
 The action of one firm depend on and
influence the action of another.
Characteristics of
Oligopolistic Market
 An industry dominated by a small number of
large firms.
 Firms sell either identical or differentiated
products.
 Notable example of identical products are
petroleum, steel and aluminum.
 Differentiated products oligopolies tend to focus
on consumer goods that satisfy the wide variety
of consumer wants and needs. A few examples
include automobiles, household detergents and
computers.
Characteristics of
Oligopolistic Market
 The industry has significant barriers to
entry (the most common barriers to entry
include patents, resource ownership,
government franchises, start-up cost, &
brand name recognition).
Behavior of
Oligopolistic Market
 Interdependence: Each oligopolistic firm keeps a
close eye on the activities of other firms in the
industry. Decisions made by one of firm
invariably affect others and, invariably affected
by others.
 Rigid Prices: Many oligopolistic industries (not
all, but many) tend to keep prices relatively
constant, preferring to compete in ways that do
not involve changing the price.
Behavior of
Oligopolistic Market
 Non-price Competition: Oligopolistic firms have
little to gain through price competition, they
generally rely on non price method of Competition.
Common methods are: (a) advertising, (b) product
differentiation, and (c) services.
 Mergers: Oligopolistic firms perpetually balance
competition against cooperation. One way to
pursue cooperation is through merger(legally
combining two separate firms into a single firm. It
gives resulting firm greater market control.
Behavior of
Oligopolistic Market
 Collusion: Two or more firms that secretly agree
to control prices, production, or other aspects of
the market.
Examples of Oligopolistic
Company
OLIGOPOLY
MODELS
Kinked Demand Curve Model

MC

Demand Curve/AR
MR

 when price increases above P40 the demand curve becomes more
elastic, but a decrease in price below P40 makes the demand curve
less elastic.
Kinked Demand Curve Model
SUMMARY:
 also known as Sweezy oligopoly Model
 Introduced by Paul Sweezy in 1939 in an attempt to
explain price rigidity.
 Firms believe rivals match price cuts, but not price
increases. Small price increases result in relatively large
decrease in quantity demanded. Large price decreases are
needed to gain relatively small increase in quantity
demanded
 When price increases the demand curve becomes
more elastic, but a decrease in price the demand curve
tend to be less elastic.
Collusion Model
Collusion Model

 Cartel – (Explicit Collusion) A group of firms that gets


together and makes joint price and output decisions to
maximize joint profits.
The organization of petroleum‐exporting countries (OPEC) is
perhaps the best‐known example of an international cartel; OPEC
members meet regularly to decide how much oil each member of the
cartel will be allowed to produce.

Types of Cartel:

 Market Sharing Cartel – gives each member the exclusive right


to operate in a particular geographical area.
 Centralized Cartel – this is a formal agreement among the
oligopolistic producer of a product to set the monopoly price,
allocate output among its member and determine how profits are to
be shared.
Collusion Model

 Tacit Collusion – (Implicit Collusion) occurs


when price- and quantity-fixing agreements
among producers are implicit.

 price leadership - In this case, one firm


takes the lead of setting a price that will
boost profits for the entire industry. Other
firms then go along with this price,
knowing that they stand to benefit by
doing so.
Behavior in Collusion Model

 Acting Like Monopoly (Cooperation) – rather than


maximizing the profit of each for each individual firm, the firm
maximize total industry profit as if a monopoly controlled the
industry. Cooperating firm can agree to charge a higher price
and produce less output just like monopoly.

 Cheating among firms (Competition) – the major problem


collusion whether implicit or explicit, is the tendency for each
firm to cheat on the agreement. Collusion works only if all
firm in the industry maintain same price and restricting the
quantity supplied. Example: one of the firms reduces its price
and produces more to boost it share and profit.
Game Theory
Non Price Competition
Game Theory

 A technique often used to analyze


interdependent among oligopolistic firm.

 The standard game theory analysis is based on


the alternative outcomes that arise given a
choice that each of two players face.

 It illustrates that cooperation rather competition,


between two players can lead to an outcome
beneficial to both players.
Game Theory

Advertising Game
Given these alternative outcome what would be the “best” option, that is,
most profitable outcome?
Game Theory

Given these alternative outcome what would be the “best” option, that is,
most profitable outcome?

To advertise is the best option. If B does not advertise, A


will because $75,000 beats $50,000. If B does advertise,
A will also advertise because a profit of $10,000 beats a
loss of $25,000. A will advertise regardless of what B
does. Similarly, B will advertise regardless of what A
does. If A does not advertise, B will because $75,000
beats $50,000. If A does advertise, B will too because a
$10,000 profit beats a loss of $25,000.
The
Bad and Good
of
OLIGOPOLY
The Bad/Disadvantages of
Oligopoly

 Inefficiency: oligopoly does not efficiently allocate


resources. Like any other firm with market control, an
oligopoly charges higher prices and produces less
output.
 Concentration: Another bad is that oligopoly tends to
increase the concentration of wealth and income. While
the concentration of wealth is not bad unto itself, such
wealth can then be used (or abused) to exert influence
over the economy, the political system, and society,
which might not be beneficial for society as a whole.
The Good/Advantages of Oligopoly

 Innovations: Of the four market structures, oligopoly is


the one most likely to develop the innovations that
advance the level of technology, expand production
capabilities, promote economic growth, and lead to
higher living standards. Oligopoly has both the motive
and the opportunity to pursue innovation. Motive comes
from interdependent competition and opportunity arises
from access to abundant resources.
 Economies of Scale: Oligopoly firms are also able to
take advantage of economies of scale that reduce
production costs and prices. As large firms, they can
"mass produce" at low average cost.
OLIGOPOLY vs the
Three other Market
Structures
Different Market Structures

Overall Comparison:

Basis Perfect Monopoly Monopolistic Oligopoly


Competition Competition
1. Number Very large Single seller Large number of Few Big sellers
of Sellers number of sellers
sellers
2. Nature of Homogeneous No Close Closely related Products are
Product Products Substitutes but homo­geneous
differentiated under Pure
Products Oligopoly and
differentiated
under
Differentiated
Oligopoly
The Comparison Among Different
Market Structures
Basis Perfect Monopoly Monopolistic Oligopoly
Competition Competition
3. Entry and Freedom of entry Entry of new firms Freedom of entry Restrictions on
Exit of Firms and exit and exit of old and exit entry of new firms
firms is restricted
4. Demand Perfectly elastic Downward slop­ing Downward sloping Indeterminate
Curve demand curve demand curve demand (but more demand curve
(less elastic) elastic)
5. Price Uniform price as Firm is a price- Firm has partial Price rigidity due
each firm is a maker. So, price control over price to fear of price war
price-taker discrimination is due to product
possible. differentiation.
6. Selling No selling costs are Only informative High selling costs Huge selling costs
Costs incurred selling costs are are spent are incurred
incurred
Thank
You!

Reference: AmosWeb.com

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