oligopoly markets

8/8/2019 Oligopoly Markets

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“IN CRITICAL MOMENTS EVEN THE VERY POWERFUL

HAVE NEED OF THE WEAKEST”



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MARKETS

• ………is a situation where buyers and sellers

come in contact with each other for buying and

selling goods and services at a particular price

at a point of time.

Two Parties

Commodity or Services

Price

Time



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Market as per competition

• Pure or Perfect competition

• Imperfect competition

(1) Monopolistic Competition

(2) Oligopoly—Duopoly

• Monopoly



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Market as per competitionMarket as per competition

Perfect

Competition

Imperfect

Competition

Monopoly

Monopolistic

Competition

Oligopoly Duopoly



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Oligopoly Competition

• Few sellers and many buyers• Homogenous – Pure oligopoly

Heterogeneous—Imperfect oligopoly

• Firm is a “Price-Searcher”• Barriers to entry

• Interdependency of sellers

• Price rigidity• High selling– cost

• Example: Automobile, Mobiles, Communication

network, steel, cement etc



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Duopoly Competition

……The Simplest form of oligopoly.



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Forms of Oligopoly

Non-Collusive Oligopoly Collusive Oligopoly

•Cournot’s Model•Bertnard’s Model•Stackelberg’s Model•Chamberlin’s Model

•Sweezy’s “Kinked DemandModel”

Cartels

Price Leadership



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Collusive Oligopoly

1. Cartels aiming at Profit

Maximization

2. Market-Sharing Cartels

1. Low- Cost Firms

2. Dominant Firm

3. Barometric

CartelsPrice Leadership



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Collusive Oligopoly

• One way of avoiding the uncertainty

arising from oligopolistic interdependence

is to enter into collusive agreements.Cartels and Price Leadership are the two

types of Collusive Oligopoly. Both forms

generally imply tacit (secret) agreements,since open collusive action is commonly

illegal in most countries at present.



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Collusive Oligopoly

• Although direct agreements among theoligopolistic are the most obvious

examples of collusion, in the modern

business world trade associations,professional organizations and similar

institutions usually perform many of the

activities and achieve in a legal or indirectway the goals of direct collusive

agreements.



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Cartels• Cartels imply direct (although secret)

agreements among the competing firms.

1. Cartels aiming at Joint-Profit Maximisation:

Here the firms are looking at maximisationof the industry profit. The firms appoint a

central agency to which they delegate the

authority to decide not only the total quantity

and the price at which it must be sold so as to

attain maximum group profit, but the allocation

of production among the members of the

cartel...



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Cartels conti….

…and the distribution of the maximum joint profitamong the participating members. In practice

cartels rarely achieve maximum joint profits on

account of various reasons like mistakes in

estimation of market demand, MC, slow

process of cartel negotiations, the bluffing

attitude of some member, free of Government

interference, they wish to have a good publicimage, free of entry and keeping freedom

regarding design and selling activities.



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Cartel

2. Market Sharing Cartels:This form of collusion is more commonin practice because it is more popular. Thefirms agree to share the market, but a

considerable degree of freedom concerningthe style of their output, their selling activitiesand other decisions.

There are two basic methods of sharing the market:

a. Non-price Competition and

b. Determination of Quotas.



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Cartels

a. Non-Price Competition Agreements:In this form of ‘loose’ cartel the member firms agree on a common price, at which eachof them can sell at any quantity demanded.

The price is set by bargaining must be suchas to allow some profits to all members. Thefirms agree not to sell at a price below thecartel price, but compete on a non-pricebasis. They are free to vary the style of their product and/or their selling activities such acartel is more unstable and may lead to a

price-war with only the fittest surviving.



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Cartels

b. Sharing of market by Agreement and Quotas:

The second method for sharing the market is theagreement on quotas i.e., agreement on the quantitythat each member may sell at the agreed price (or prices). These quotas may be decided on the basis of

past levels of sales, and/or the basis of ‘productivecapacity’. A major factor here becomes the bargainingpower and skill. Another popular method of sharingthe market is the definition of the region in which eachfirm is allowed to sell. In this case, of geographical

sharing of the market, the price as well as the stylemay differ. However, even a regional split of themarket is inherently unstable as the low-cost firmsalways have the incentive to reach out to adjacentmarkets.



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Price Leadership

• In this form of coordinated behaviour of oligopolist one firm sets the price and othersfollow it. Because it is advantageous to them or because they prefer to avoid uncertainity about

their competitors reaction even if it impliesdeparture of the followers from their profitmaximising position. Price leadership iswidespread in the business world. It may be

practiced either by explicit agreement or informally. In nearly all cases, price leadershipis tacit, open collusive agreement are illegal in

most countries.



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Price Leadership

• Price leadership is more widespread thancartels, because it allows the members

complete freedom regarding their product and

selling activities as compared to a completecartel. If the product is homogeneous and the

firms are highly concentrated in a location, the

price will be identical. However, if the product is

differentiated prices will differ, but the direction

of their change will be the same, while the

same price differentials will broadly be kept.



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Price Leadership

1. Price Leadership by a low-cost firm.2. Price Leadership by a large (Dominant) Firm:

This refers to the firm having the

considerable share of the total market.

3. Barometric Price Leadership:

The firm chosen as the leader is considered

as a barometer, reflecting the changes in economic

environment. Usually it is a firm which from pastbehaviour has established a reputation of a good

forecaster of economic changes. A firm belonging to

another industry may also be chosen as the barometric

leader.



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The March of Global Oligopolist

• No longer are corporations

satisfied to be the largest or the

next-to-the-largest nationalcompany in their industry or

sector. They are looking at the

entire globe are mergers.



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Paul Sweezy’s Kinked Demand

Curve

DD

dd

P

QoX

Output

P r

i c e

Y

P1

E<1

E>1



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MEANING

• CARTEL: A manufacturers' agreement or

association formed to control marketing

arrangements, regulate prices, etc.

• COLLUSIVE: An agreement between two

or more people

• TACIT: Implied without being openly

expressed or stated; understood, inferred.

oligopoly markets

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