Outcomes

Explain the assumptions of oligoplistic markets.

Discuss, illustrate and comment (where
applicable) the following theories in oligopolistic
markets:
Cartel theory
Illustrate and explain why an incentive exists to forn a cartel.
Discuss the reasons why it is difficult to form a cartel and
sustain it.
Use a graph to illustrate and explain the problem of
cheating.

The kinked demand theory

Price leadership theory

Assumptions: Oligopolies
1.Few sellers & many buyers
- Firms are interdependent
- Price searcher
- Produce where MC = MR
2.Homogeneous or differentiated products
3.Barriers to entry: economies of scale, patents,
control over resources, legal barriers

Kinked demand curve

Why prices are rigid?
Role of elasticity of demand.

Figure 11.11: The Kinked Demand Curve

R/Q

MC2

P*

MC1

Quantity

Q*
MR

Price leadership theory

Dominant firm determines price & other firms
(price takers) take price as a given.

Figure 11.11: Price Setting by a Dominant

Firm
Price

DM
SS

P1
MCD

P*

DD
P2

QS QD

QT

Quantity
MRD

Class example:

Firm A (price leader) = 70% market share

Set price = R10
Rest of the firms = 30% market share
Total market share = 1000 units

Cartel theory
Firms act as if only 1 firm exists in the industry
Achieve monopolistic outcomes
Cartel: an organisation of firms which reduces
output and increase prices to improve profits.
Behaviour is cooperative rather than
competitive.

Figure 11.12: The OPEC Oil Cartel

Price

DT

SS

P*

DOPEC
MCOPEC

PC
MROPEC

QC

QOPEC

QT

Quantity