OLIGOPOLY

Oligopoly is an industry dominated by relatuvely few firms. They tend to be few because large amount of capital are required to set up operations. There are other barriers that help to prevent new firms from entering these industries; exclusive patents are high marketing cost are examples. Other industries that are characterized by oligopoly are stell, aluminum, petroleum refining, machinery, typewriters and electric lihgt bulbs, to mention only a few. An industry may be dominated by a handful of firms producing for specialized markets. In aluminum there are just three large firms. In autos there are four large firms and a number of foreign firms which sell in the Philippine market. Petroleum has three very large firms, a moderate number of medium-sized firms, and a host of small firms. Oligopolies formed naturally in the auto and steel industries. In the beginning, many small firms competed for market shares. But the heavy cists of initial capital equipment made unit production costs high. Combining several firms though merger permitted capital costs to be spread over a larger combined volume. A merge firm could then undersell its rivals, drive them ou of business, and sometimes by them up at bargain prices. Eventually, the number of firms was reduced to a few large of giants. In some industries the process of mergering slowed when public attention ws aroused. Now the large firms tolerate and even encourage the growth of small firms in order to avoid public pressures to break up the large ones.

Characterisics of Oligopoly y y y y y y y There are only a few seller There is mutual interdependence among the few sellers There is a rigid price Product sold may be homogeneous or differentiated There may be a price leader There are some barriers entry into the market There is non-price competition

The Kinked-Demand Curve and price rigidity

The kinked-demand curve model seeks to explain the observed existence of price rigidity or inflexibility in oligopolistic market. It postulates that the demand curve facing each oligopolist has a kink or is bent at the prevailing market price. The deamnd curve is much more elastic above the kink than below because other oligopolist will not match price increases but will match price cuts. As a result, the MR curve has a discontinuous vertical section directly below the kink. As long as the MC curve shirts within the vertical section of the MR curve, the oligopolist keeps his price unchanged or rigid. Example: The demand curev facing the oligopolist is CEJ and a kink at the prevailing price P4 per unit and quantity of 200. Note that demand curve CEJ is much more elastic above the kink than below, illustrating the assumption that the other oligopolists will not match price increases but will much price cuts. The corresponding marginal revenue curve is CFGN; CF is the suggested corresponding to the CE portion of the deamnd curve; GN corresponds to the EJ portion of the demand curve. The kink at point E on the demand curve causes the discontinuity between F and G in the marginal revenue curve. The oiliopolists marginal cost curve can rise or fall anywhere within the vertical (discontinuous) portion of MR curve without inducing the oligopolist to change the sales level and the price of P4 it charges. Note thet again, P exceeds MR where MR = MC, and so the rising portion of the MC curve above AVC does not represent the oligopolists supply curve.

8 7 6 5 4 3 2 1 0 100 200 300 400 500 600 700 G N C E F d MC2 MC