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Price Determined Under Oligopoly

Price Determined Under Oligopoly

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Price Determined Under Oligopoly
Price Determined Under Oligopoly

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05/16/2013

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Price Determined Under Oligopoly

Presented By:Apoorv Goel (06) Dhawal Sharma (14) Poonam Khurana (38) Prehans Singh Sourabh Jalan Ujjwal
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INTRODUCTION
The Term “Oligopoly” has been derived from two Greek words. ‘Oligi’ which means few and ‘Polien’ means sellers.
  

Thus Oligopoly is an abridged version of monopolistic competition . It is a competition among few big sellers each one of them selling either homogenous or hydrogenous products.

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Meaning Of Oligopoly

Oligopoly refers to a market situation where there r a few sellers (2 to 10) in a market, selling homogenous or differentiated products. Oligopoly is often described as ‘Competition among few’. When the products of a few sellers are homogenous it is known as ‘Pure Oligopoly’ When the products of few sellers are differentiated , but close substitutes of each other it is known as “Differentiated Oligopoly” .

 

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What are some examples of Oligopoly?
       

Automobiles Steel Soup Cereals

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What determines if a market is an Oligopoly?

The concentration ratio

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What concentration ratio constitutes an Oligopoly?

There is no magic number, but if a large percentage of the sales are from the 4 largest firms, it’s an Oligopoly

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What is an example of a high concentration ratio?

Out of 151 firms in the aircraft industry the leading 4 constitutes 79% of total sales

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Characteristics Of Oligopoly
Few Sellers  Homogeneous or Differentiated Product  Interdependence :  Importance of Advertising and Selling costs  Price Rigidity  Restriction to Entry

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HOW PRICES ARE DETERMINED?
Interdependent Pricing  Price wars  Price Leadership  Formal Agreement : Cartel

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1. Interdependent Pricing

Some economists have assumed that oligopolistic firms ignore interdependence . When interdependence disappears from decision making the demand curve facing the oligopolistic becomes determinate.

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2. Price Wars
Some economists assume that an oligopolistic is able to predict the counter moves of his rivals, and they provide a determinant solution to the price and output problem.  The objectives of price wars : i. To seize the major part of the total sales ii.To expand the monopoly power after victory iii.To threaten the rivals so that they they accept its leadership.

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3.

Price Leadership

Another approach is that the firms in an Oligopoly would accept one firm as a leader and would follow him in setting prices. Such a leader firm may be dominant or low-cost firm producing a very large proportion of the total production and having a great influence over the market.  The form of price leadership: i. Leadership of dominant firm ii.Barometric price leadership iii.Exploitative or Aggressive leadership
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4. Formal Agreement : Cartel
A group of firms that collude to limit competition in a market by negotiating and accepting agreed-upon price and market shares.  Two models of imperfect cartels: i. Joint-Profit Maximizing Cartels ii.Market-sharing cartels iii.

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Kinked Demand Curve Model

According to the kinked demand curve hypothesis, the demand curve facing the Oligopolistic has a ‘Kink’ at the level of the prevailing price. The kink is formed at the prevailing price level because the segment of the demand curve above the prevailing price level is highly elastic and the segment of the demand curve below the price level is inelastic.

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Y d

Pric e

P

k D

X Q Outpu t Kinked Demand Curve Under Oligopoly

O

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Game Theory
A theory of strategy ascribed to a firm’s behavior in oligopoly  What is the Prisoner’s Dilemma?  - A series of individual choices within a small group, each one’s choice effects the outcome of the others.

 

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- An example of the Prisoner’s Dilemma is the Payoff Matrix -

Both Sam and Bill confess Bill confesses and Sam doesn’t

Sam confesses and Bill doesn’t Neither Sam nor Bill confesses
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Cournot’s Duopoly Model
Augustin Cournot, the French economist, developed the earliest model of duopoly in 1838.  Following assumptions are: i. Two sellers ii.Prefectly substitute commodity iii.Indentical cost iv.No entry v.Absence of inter-dependence.

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THANK YOU

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