Oligopoly

 Oligopoly Market Characteristics

 Few sellers.

 Homogenous or unique products.

 Blockaded entry and exit.

 Imperfect dissemination of information.

 Opportunity for above-normal (economic) profits in long-run equilibrium.

 Examples of Oligopoly

 Carbonated Beverage Market (Pepsico & Coca Cola), Domestic aviation Industry in India
(Few Players like Air India, Spice jet, Indigo).

 In this form of market structure, the number of sellers is few such that a seller can closely watch
what his co-seller is doing in terms of his price & output and take that into consideration while
doing his own profit maximization exercise.
 For instance: Let P = a – bQ be the market demand curve where the market is
supplied by two sellers 1 & 2. Then market demand can be expressed as
P = a – b (Q1+Q2). Now firm/seller 1 will define his profit function as
Π = TR –TC = PQ1 – C1 = {a – b(Q1+Q2)}Q1 – C1 .
Thus now with oligopoly, a seller’s profit function includes rival’s output Q2 as
given, which was not the case in other forms of market. Similarly, it can also include
P2 if sellers are competing based on Prices and not on market share

This value of rival’s output (Q2) is arrived at by a seller by looking at how rival was
selling in last period. He looks at the quantity or price his rival was selling or
charging in last period and assumes (guesses or conjectures) that the rival will
continue to do the same in this period and based on this guess about Q2 or P2, he
incorporates these Q2 or P2 in his profit function and maximizes his profit and
determines his equilibrium quantity (Q1) to be sold and price (P1) to be charged.

The seller does not, however, talk to his rival to understand exactly what would be
Q2 or P2 . This is the case of non-collusive oligopoly.

There are several models of non-collusive oligopoly depending on different types of

conjectures/guesses that a seller makes about his rival.
 Non-Collusive Oligopoly Models

 Cournot Duopoly Model – when a seller makes a guess about his rivals output behavior Ex:
Coke and Pepsi

 Bertrand’s Duopoly Model - when a seller makes a guess about his rival’s price behavior Ex:
Times of India and Hindustan Times

 Stackelberg’s Duopoly Model – when a seller is a market leader in the sense he knows the
demand and cost conditions of the market and also knows that his rival will watch his
behavior and take it into his decision making. This normally happens when a seller is a first-
mover in the industry. Ex: Sony in gaming industry.

 Sweezy’s Kinked demand curve Model- guess of a seller is if he raises price no co-seller will
follow him but if he lowers price all co-sellers will follow

 Limitation of Non-Collusive Oligopoly

Non-collusive form of oligopoly gives rise to a lot of uncertainty. Because entire profit maximization
exercise of a seller is based on guess about rival’s behavior. If rival’s behavior does follow what he
guessed, then his profit max exercise fails to give the maximum profit.

To avoid such uncertainty sellers in oligopoly market often move towards Collusive oligopoly by
secretly colluding with co-sellers

 Collusive Oligopoly

 Cartels – market sharing, joint profit maximization may be the objective of the cartel

 Mergers – become one seller

 Price Leadership – either the dominant firm or the low cost firm will set the price, others will
follow it.

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