Report of Lopez, Jose Miguel B.

Things to remember about Oligopoly:

 Oligopoly is a state of limited competition in which a market is shared by a few

producers or sellers. (oligos (Latin) = little or small; polein (latin) = to sell).
 Oligopoly is a market structure in which a few firms dominate the industry; it is an
industry with a five firm concentration ratio of greater than 50%.
 In oligopoly, firms are interdependent; this means their decisions (price and output)
depend upon how the other firms behave.
 COOPERATION with other firm is present in oligopoly.
 A monopoly is one firm, duopoly is two firms and oligopoly is two or more firms. There
is no precise upper limit to the number of firms in an oligopoly, but the number must be
low enough that the actions of one firm significantly influence the others.
 Examples of oligopolies are: steel manufacturers, oil companies, rail roads, tire
manufacturing, etc.
 According to Law of Demand, the price and quantity demanded are inversely
proportional. In other words, the higher the price of the product, the lower the demand
on that product because consumers use economic goods to satisfy their most urgent
needs first.

The Prisoner’s Dilemma

In game theory itself, the prisoner's dilemma is a paradox in decision analysis in which
two individuals acting in their own self-interests do not produce the optimal outcome. The
typical prisoner's dilemma is set up in such a way that both parties choose to protect themselves
at the expense of the other participant. As a result, both participants find themselves in a worse
state than if they had cooperated with each other in the decision-making process. The prisoner's
dilemma is one of the most well-known concepts in modern game theory.
 Application on oligopoly market structure, the prisoner’s dilemma is a type of game that
illustrates why cooperation is difficult to maintain for oligopolists even when it is mutually
beneficial. In this game, the dominant strategy of each actor is to defect. However, acting in self-
interest leads to a sub-optimal collective outcome. It also shows why two individuals might not
cooperate, even if it appears that it is in their best interests to do so.

P15M P15M
P30M P5M

P5M P30M
P10M P10M

Explanation:

 First Grid (High A – High B): The two firms cooperate and agreed to each other that their
product will be in high price and restricts output, resulting to monopoly profit. In other
terms, Collusion between the two firm exist (in tagalog, kasabwat sa isa’t isa).
 Second Grid (Low A – High B): Firm A decided to lower its price, resulting in gaining
more market share and more profit or future profit, leaving Firm B small market share
and low profit or future profit.
 Third Grid (High A – Low B): Firm B decided to lower its price, resulting in gaining
more market share and more profit or future profit, leaving Firm A small market share
and low profit or future profit.
 Fourth Grid: The two firms have not colluded with any other party to fix or adjust the
tender price. They have not communicated the tender price or terms to any other party.
The two firms seek to increase market share the most likely outcome is that they both set
low prices and make a low profit (P10M each). Nash Equilibrium and Non-collusion
between the two firm exist (in tagalog, hindi nakipagsabwatan sa ibang kumpanya –
hindi nakipag-usap sa isa’t isa kung ano ang gagawin ng isang kumpanya sa presyo ng
kanyang produkto.)
Added Information:

Collusion is possible in oligopoly, but it depends on several factors. Collusion is more

likely if

 There are a small number of firms, who are well known to each other – this makes it
easier to stick to output quotas
 A dominant firm, who is able to have a lot of influence in setting the price.
 Barriers to entry, this is important to stop other firms entering to take advantage of the
high profits
 Effective communication and monitoring of output and costs
 Similar production costs and therefore will want to raise prices at the same rate
 Effective punishment strategies for firms who cheat
 No effective government legislation (e.g. collusion is illegal in the UK).

Monopoly Profit occurs when a firm restricts output so as to prevent prices from falling to the
level of costs.

Nash Equilibrium is a concept within game theory where the optimal outcome of a game is
where there is no incentive to deviate from their initial strategy. More specifically, the Nash
equilibrium is a concept of game theory where the optimal outcome of a game is one where no
player has an incentive to deviate from his chosen strategy after considering an opponent's
choice. Overall, an individual can receive no incremental benefit from changing actions,
assuming other players remain constant in their strategies.

Price and Non-price Competition

Price competition exists when marketers complete on the basis of price. In price
competition, the marketers develop different price strategies to beat the competition. They
generally set a same or low price of a product than that of the competitors to gain the market
share. Generally, the prices are changed to cover the costs or increase the demand. For instance,
Coca-Cola and Pepsi are close competitors, thus, they often engage in price wars. The major
disadvantage of price competition is that the competitors have flexibility to change the prices of
products. Price is a very important decision criteria that customers use to compare alternatives. It
also contributes to the company’s position. In general, a business can price itself to match its
competition, price higher, or price lower. Each has its pros and cons. Sadly, oligopolies often
doesn’t engage in price competition.

Non-price Competition Focuses on the factors other than the price of the product. In
non-price competition, customers cannot be easily lured by lower prices as their preferences are
focused on various factors, such as features, quality, service, and promotion. Thus, the
marketers focus on these factors to increase the sale of products. For instance, customers prefer
buying expensive luxury products for gaining status in the society. The demand for these
products does not shift even if their prices increase. Thus, in case of non-price competition, the
marketers try to promote the product by exhibiting its distinguishing features. However, a
marketer who is competing on non-price basis cannot ignore the prices set by the competitors as
price remains a significant marketing element. Oligopoly mostly engage in non-price
competition.

Non-price Competition in Oligopoly

The majority of industries are a form of oligopoly with a few firms dominating the
market. The firms in an oligopoly can compete in price, but often non-price competition becomes
the most important factor dominating the market.

This shows a mixture of factors both price and non-price competition, that can become
important in markets:

Examples of Non-price Competition:

1.) Loyalty Card. Some big business have invested considerably in loyalty cards which give
‘rewards’ or money back to customers who build up points/spending. Airlines use
Airmiles to try and encourage repeat custom. Supermarkets use loyalty cards like Tesco
points/Nectar(Sainsburies)
2.) Direct Mailing. A key method of retaining customers is through gaining access to their
email address and then sending targetted promotions and news about new
features/products. Some firms may give loyal customers the chance to get special deals or
products not available to the mass market.
3.) Subsidised Delivery. Amazon has been successful at pushing Prime Delivery accounts.
This promises free next day delivery. Amazon is offering this delivery service as a loss
leader. The cost of delivery is often higher than what a customer is actually paying.
However, in the long-term, the convenience of Prime Delivery is changing shopping
habits. Buying something on Amazon and having it arrive at your doorstep the next day,
means customers are not wanting to go into town, park and shop at traditional stores.
Amazon is steadily gaining more market power and market share.
o Supermarkets like Tesco and Sainsbury’s are also investing in online delivery of
groceries. Again the cost to supermarkets of delivery is higher than the price
customers are paying, but now it is established supermarkets don’t want to risk
losing market share by making delivery more expensive.
4.) Ethical/charity concerns. Some firms may promote an ethical line of marketing, for
example, ‘fair-trade’ coffee appeals to customers who wish to buy goods with a social
conscience.
5.) Unique selling points. In recent years, firms have concentrated on offering differentiated
products and products that can be customised to consumer preferences. For example,
food companies are offering a greater diversity of products, such as gluten free, sugar-
free, vegan – niche products which appeal to a small segment. 3D Printing means firms
can increasingly allow customers to be more specific in specifying the size, length and
colour of products. Mass produced, homogenous ‘Off the shelf’ products increasingly
feel outdated.
6.) Advertising/brand loyalty. Firms spend billions on advertising because repeated exposure
to famous brands can make consumers more likely to buy ‘trusted’ brands. High brand
loyalty can also create barriers to entry. For example, many firms have tried to enter the
market for cola, but have been unsuccessful, due to the success of Coca-Cola and Pepsi in
creating strong brand loyalty. Even the internet has done nothing to disturb this duopoly.
7.) After-sales service. For some goods, like TVs and car, offering free after-sales service
can be a factor in encouraging customer trust. It can also be a profitable aspect of the
business. For example, Apple Care offers a three-year warranty, but it is priced at a good
margin.
8.) Cultivation of good reviews. In an online world, good reviews are increasingly important
– especially for industries like tourism. Therefore, firms have an incentive to encourage
happy customers to leave reviews. If you buy something from Amazon – quite frequently
the 3rd party firm selling the product will include a leaflet – asking you to leave a
positive review on Amazon. One printing company I used offer £5 cashback for any
published review on social media.
9.) Offering bundles of products. Supermarkets may group ingredients which make an
Indian meal together. The hope is that it will encourage people to try new ingredients.
The profit margin can often be higher on bundles of products. For a company like Apple,
they push new technology – which requires you to buy very expensive adapters from
 them. Recently I got a new MacBook Pro. To connect my Apple Monitor to the new
USB-C port, I had to buy an adapter from Apple costing £45. (This is using market power
to push related goods/services0
10.) Foreseeing trends in markets. Many successful retailers have gone out of
business because they were stuck with old business models. Successful firms need
tremendous adaptability and innovation to move into new markets and trends. For
example, retailers who successfully moved into an online presence have been more
adaptable to trends in consumer behaviour.
11.) Pay for the best workers. In some industries, success may all depend on the
quality of the staff. For example, restaurants may want to employ the top chef. Football
clubs the best footballers and managers. In other industries, firms may work hard to keep
the workforce motivated by share employee schemes – giving workers a share in the
firm’s fortunes.

Cartel Cheating

A cartel is defined as a group of firms that gets together to make output and price
decisions. The conditions that give rise to an oligopolistic market are also conducive to the
formation of a cartel; in particular, cartels tend to arise in markets where there are few firms and
each firm has a significant share of the market.

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.

Oligopolistic firms join a cartel to increase

their market power, and members work
together to determine jointly the level of output
that each member will produce and/or the price
that each member will charge.

By working together, the cartel members are

able to behave like a monopolist. For example, if
each firm in an oligopoly sells an
undifferentiated product like oil, the demand
curve at each firm faces will be horizontal at the market price. If, however, the oil‐producing
firms form a cartel like OPEC to determine their output and price, they will jointly face a
downward‐sloping market demand curve, just like a monopolist. In fact, the cartel's profit‐
maximizing decision is the same as that of a monopolist, as Figure reveals.
The cartel members choose their combined output at the level where their combined
marginal revenue equals their combined marginal cost. The cartel price is determined by
market demand curve at the level of output chosen by the cartel. The cartel's profits are equal to
the area of the rectangular box labeled ABCD in Figure . Note that a cartel, like a monopolist,
will choose to produce less output and charge a higher price than would be found in a perfectly
competitive market.

Once established, cartels are difficult to maintain. The problem is that cartel members
will be tempted to cheat on their agreement to limit production. By producing more output
than it has agreed to produce, a cartel member can increase its share of the cartel's profits.
Hence, there is a built‐in incentive for each cartel member to cheat.

Of course, if all members cheated, the cartel would cease to earn monopoly profits, and
there would no longer be any incentive for firms to remain in the cartel. The cheating problem
has plagued the OPEC cartel as well as other cartels and perhaps explains why so few cartels
exist.

References

 https://www.cliffsnotes.com/study-guides/economics/monopolistic-competition-and-
oligopoly/cartel-theory-of-oligopoly
 https://www.investopedia.com/terms/n/nash-equilibrium.asp
 https://www.investopedia.com/terms/l/lawofdemand.asp
 https://www.economicshelp.org/microessays/essays/how-firms-oligopoly-compete/
 http://www.economicsdiscussion.net/difference-between/difference-between-price-and-
non-price-competition/3829
 https://courses.lumenlearning.com/boundless-marketing/chapter/competitive-dynamics-
and-pricing/
 https://www.economicshelp.org/blog/145423/economics/non-price-competition/
 https://www.investopedia.com/terms/p/prisoners-dilemma.asp
 https://courses.lumenlearning.com/boundless-economics/chapter/oligopoly-in-practice/

Images

 https://www.greenflux.com/why-the-smart-charging-of-electric-vehicles-is-not-like-your-
average-prisoners-dilemma/
 https://www.economicshelp.org/wp-content/uploads/2017/12/collusion-game-theory.png
 https://www.economicshelp.org/wp-content/uploads/2018/12/how-firms-
compete.png.webp
 https://en.wikipedia.org/wiki/OPEC
 https://www.cliffsnotes.com/~/media/14e62b3ff608457d8d5b3cf600b44a40.ashx?la=en