92

6 OLIGOPOLY

6.1 Meaning
6.2 Characteristics of Olig opo ly
6.3 Collusive and Non -Co llus ive Oligopoly
6.4 Non-Collusive Olig opo ly
6.5 Collusive Olig opo ly- Cartel Formati.on
6.6 Price Leadership

'Zfff4"~~rfffil'%"-'%'~~:---·7~~,,,~~::r-:~-r~~ -fP~~ W7"~ --. 'f'-~ ~

•... : ,. ,~ ~ .

Oligopoly is a mar ket form in whi ch ther e are

few sellers ~
commodi~- ~
hom oge neo us or diff eren tiat ed pro duc ts. If the
homogenous, it is call ed pur e olig opo ly. It is a
differenb.l~
~ligopoly ~ark et, if the pro duc t is differentiated. Th
eo ~'•~
mto the oligopoly market is allo wed but in reality it is
ve-ry dii6: . .,
whett ~ ·:
In India we have the oligopoly mar ket in automobiles
ket. ~
~o~ p - cars, scooters, trucks - is an oligopoly mar
sonlt \
airlines, refrigerators, T. V. sets, air con diti one rs are
examples of oligopoly markets in India.
 ' 1(1/ 1( )/_1/ , ,, , -~
l JII," . . --
'·r• ""' ,

.~- · ·c11ARACTERISTICS OP
i t;,Z ,
oueo
• . , ;•"L
.;..-Y-
· '· ,., -, .. -,,,.,.,... _. 91

~1,eW
selle rs : Oligo poly form of mark et con .
f . •
ainst per ett an d impe
. f
r ect market th s1sts of few 1
se 1erC3.
f\ S ag - . 1· . d II , e numb
. · i·gopoly 1s umte , usua y the oligopoly n herer. of se11ers
tJ1 o t
ten. In case t h ere are more sellers, a few um. beis not ?1ore
than other b e1ng
. 1ns1g
. . n1'f. w111 domm an t
.
firt11 ,
5
s 1cant.
n-1ogeneous or Diffe renti ated product• OligoP .
fl o.. A., • d . . . • o11sts usuall y
se 11 d iffere ntiat ed pro ucts. Diffe rentia tion is in the fo f
. . - rmo
rnark, desig n or. service. . Developing brand equity ha be trade
impor tant for ohgo poly firms. s come

Entry is poss ible but d~fficult : A new firm can enter the
oligopoly ma~k et. ~ realit y, ho~e ver, it is highly difficult to
enter due to finan cial, techn ologi cal and other barriers to the
entry. Whe neve r the profi ts ~re high, new firms do enter the
market.
4. _ Interd epend ence : Due to few firms in the mark et, an indiv idual
firm is neith er free nor indep ende nt to take its own decision
about the outp ut and price . Any decis ion resul ting in a change
in the price or outp ut attrac ts react ion from the rival firms. There
may be diffe rent react ions from diffe rent firms.

This situa tion make s a firm depe nden t on others for its own
decisions. It is essen tial for a firm to keep in mind the possible
reactions of its c·o mpet itors whil e takin g a decision. Oligopoly
comprising a grou p of few selle rs requ ires the unde rstan ding
of Group Beha viour .

· Uncertainty : Inter depe nden ce on other firms for one's own

de · 10·
cis n creat es an atmo sp here of unce rtain ty abou t the outpu t
:d P~ice. ~f an oligo polis t incre ases his outp ut to ~ap ~ ~e
ger porti on of the mark et other s too will react ma similar
;:Y· 1
_In case he incre ases the price other s are unlik ely to do so.
at:1
~va] s Will not incre ase the price so that they ~ay sell more
the ~er price . On the cont rary when an oligopohSt decreases
anyPrice others will also redu ce the price in order to rreve nt
reduc tion in sale due t o non- comp etitiv e price . An
94 Business Economics - II (F.Y.B.Com.: SEM. -II) ,
oligopolist therefore is high ly unc erta in abo ut the reac
tion of ,
his rivals to his decision.
As W. J. Bau1nol1 puts it "rivals ma d~cide to get together
1ctive
cooperate in the purs uit.of their obJe st
and :
S, at le~ so far as law
allows or at the othe r extreme, they may try to fig~t each
other
to the deat h. Even if they enter into an ~gre~me~.t it may
last or
it 1nay brea k down". An indi vidu al. f~rm _is hig1:'1y un_ce
rtain
about his rivals reaction for any dec1s1on invo lvin g price
and
outp ut. Therefore in oligopoly a :Wide vari ety of beha
viour
patt ern is possib~e.
Indeterminateness : The dem and curv e face d by an oligo
polist
is indeterminate. Und er perfect com peli tion a firm bein
g one
of the large num ber of firms, has a perf ectl y elastic (horizonta
l)
dem and curve. Her e the firm is a pric e take r from the mark
et.
A monopolist, bein g a single seller is in a posi tion to
decide the
price and thus produ~es and sells the outp ut accordingly.
His
dem and curv e is ther efor e defi nite in the form of down
ward
sloping dem and curve.

~ firm und er mon opo listi c com peti tion can chan
ge the price
smce the num ber of firm s bein g man y, the imp act on
them is
n~gligib~e .. The diff eren t pdc e can be just ified by produ
ct
diffe rent iatio n. There£ore a Jirm in this form of mark
et need
not wor ry abo ut the poss ible reac tion of the rivals. Ther
efore a
mon opo listi c com peti tive firm too like the firm in
perfect
com peti tion and mon opo ly, faces a defi nite dem and curve
.
An olig opo ly firm bein g dep end ent on ~the r firms for
its price
and outp ut deci sion doe s not face a defi nite demand
curv~
The dem and curv e of an olig opo list lose s its definitene
ss an
dete rmi nate ness due to dep end enc y and uncertainty
factors.
Wh en olig opo ly firm s do not ente r into any agree~en
coll usio n and func tion inde pen den tly, a simp le solut
t
io:taitl
f~:
pric e and outp ut is not poss ible sinc e the firm cannot_as
c;tllal'
its riva ls reac tion . As Bau mol poin ts out "wh en a bu510
: vt
won ders abo ut his com peti tors like ly resp onse to sorn 010
-1.-- -- -- -- -- -- -- -- -- -~ .-0 :: :7kiu11,i•e. r,•iN·.
W.J. Baum ol (1922 - May 2017): American Ecotaomist, New Yor
Professor Emeritus at Princeton University.
 I
1

. 1/111/I/ • 95
LJ/1~'
, · . , he is co n s t·d cnng
· h e must recognise that h " .
wh1 C 1 k h" . Js compe titors
re ]ikely to ta e Is Interdependence ph .
too, a f" . ' t . en o menon mto
. unt. The inns a t empts to outguess one ancJth . h
.1cL o :l • t er is t en
, . .,Jy to )eac. to an 1n erp 1ay of anticipated s tr t .
1, kl . . h .
1uc . . a e g1es and
er
coun t • II
strategies w 1s tangled beyond h
ope o f d 1rect
.
Jn alys1s .

f 1,e 11 eed for determinate

. .
solution
.
depends on ~ssum pt ion
·
S or
· b' ctive on which a firm functions. The common obJ·ecti f
o 1e f. . . . "T . ve o
a fjrn, is "pro 1t ma~imisahon .. o achieve this objective a firm
e uires a determinate solution -for price and output. An
~i!opoly firm may not pursue this objective and therefore may
not unduly concern abou~ determinate solutions.

e oligopoly may · be collusive or non-collusive markets. Firms

perating in oligopoly markets tend to invest heavily in new
chinery and processes to try arid reduce their cost -and make more
ofit. Business and development expenditure is also high as they
and differentiate their products from their competitors.

inesses in non-collusive oligopoly use advertising and marketing

build strong recognition which allows them to compete qn factors
er than price and act as a barrier to entry for new firms.
n-collusive oligopoly market has the following features such as
few _large firms, entry barriers, non-price competition, product
a~dmg and differentiation and interdependence in decision
ng. Very good example of non-collusive o_ligopoly is the kinked
nd
ri a curve model. Firms in Airlines, mobile phones, auton1obiles,
gerators are some of the examples of non-collusive oligopoly.
llusive O 1. · .
th igopoly comes in existence when the firn1s work
olv:~ ~o re~uce uncertainty in the market. Firms n1ay becon1 e
in Price fixing or cartel formation.
 \ Business Economics - II (F.Y.B.Corn.: St
Price fixing takes place where all firms in the market try and "1-//j
supply, to achieve a 11nonopoly1 like situati on. For this to ~Otttro1
firms need to have an influence over supply . This is tnost ~~
when the 1n arket is domin ated by a few large firms, dern 1ke1y
inelastic, market demand doe_s not fluctuate and the £inns cait;:d.8 is
quantify the outpu t of each firm. Ily
The don,in ant (irm may take the role of price leader setting th .
for the market They may create tacit collus ion which redu e Price
. . ces th
competition among the compames. e
The main differences between the collusive and non-collu.
8I\1e
oligopoly are :

Collusive Oligopoly Non-Collusive Oligo p~

1. Firms do not compete but
co-operate. Act like monopoly
firm.
2. Same price
3. Maximise the profit of the .
group.
4. Non-price competition
5. Price leadership
6. No interdependence
7. No price war
8. Beneficial for sellers.
Firms compe te with each oth-;
They do not co-operate.
Price may differ.
Maximises individual profit.
Price compe tition possible.
Rigid price · _
Interd epend ence among selle~
Price war is possible.
Beneficial for buyers /
consu mers. ~

9. Price may remain stable. Prke may vary or flue ~

10. Entry is highly restricted. Entry is. possible though
difficult. ~
11. Takes the form of cartels. No cartel form atio n~
t,ile
12.· Examples : OPEC and other Examples :·Airlines, in0 d
cartels in different comm odities phone s, refrigerators an
and services. automobiles.
 /
I

J/i1;<1poly . 97
L · f the non-coll us1ve and co llu siv e oligopol y mo d e 1s are
'1 111 c o
~ l1 I ·ncd below.
e\P ~11 ·
.. , •,:

pRJCE RIGIDITY (KINKY DEMAN D CURVE)

,e dependency and uncertai nty aspect of the oligopol y leads to

? determina teness of the demand curve. The rigid price in oligopol y
reading to a Kink in demand curve of an oligopol ist was put forward
. dependently by Paul Swerzy, an _A merican economist and Hall
md Hitch, Oxford econom ists. Taking an example of an extreme ly .
:mited case of oligopol y i.e. a _c ase of duopoly where there are only
two firms, we can explain a1:1 oligopol ists demand curve - known as
Kinky demand curve. Fig. 6.1 explains the derivati on of Kinky
demand Curve.
There are two demand curves in the Fig. 6.1, DDa of firm A and DDb
f firm B. The former is more elastic and latter less elastic. At Point
the two demand curves intersec t.
oligopolist's demand curve has the shape shown in Fig. 6.1. At
int T it has a Kink. The TD part of the demand curve is more
tic and the TDb part is inelastic . Kinky demand curve'is obtained
taking TD part of firm A .and TDb part of firm B. . _
y y
D
D· ''
'•
I
D
' I

''
. I
'
'•
I

''
'T

~---: ..~_. .x
Quality
Db
0
L---- ---- ---..x
M
Quality
Fig. 6. J
Fig. 6.2
,. ~
' Business Economics - II (F .Y.B.Corn . gr-
98 , · .. ~M
, 2 we have OP price 1 · h OM. quant · · ·lli oli~
In F1g. 6. . .
at w 11c tty 1s sold
. ·
Th ePri
OP is expected to remam without furth~r change hence 1t is rigid Ct JeO
us understand why oligopolists do not hke to reduce or increasep:: iP e
of their product. e £41
Reduction in Price : If the oligop~lis~ reduc~s the pri~e below OP to 1]1£
ha\'e more sales of his produ ct, his nvakls will ~e qu1~k in reducing b.3.
their price inorder not to lose the mar et. It ts possible the .
. nvals
01ay cut price by a highe r margi n to captu re a larger share of the
n1 arkel In a process of price reduc tion, finally oligopolists In
succeed in getting a share of increa sed total sales due to reductiay
in price. Each one's gain will be a margi nal one. Such weak respo~
of dema nd for a change in price below Of make s TDb part of the
dema nd curve less elastic. .

Increa se in Price : If an oligopolists increa ses the price above the

prevailing price that is OP, he would lose his customers. The buyers
would purchase from other oligop.olists as the rival firms would
not increase the price due to the fear of losing the customers and
consequent decline·in sales. The declin e in sales of the firms which
increase their price depen ds on the type of produ ct (differentiated
or homogenous~ if differ entiat ed custo mers may not find a.suitab~ (
substitute) and availa bility of produ ct in the market (mel .
supply). A substa ntial decre ase in dema nd for an increase in
above OP makes the DT part of the dema nd curve more elastic,
we have the dema nd curve DDb which can be divide d intotw0
and TDb. The upper part that is DT is more elastic and the 1
isJess elastic. The differ ence in elasti cities gives a kink or
the dema nd curve at point T. .

· Price : Price charg ed by oligo polist s is expec!ed to cc,fet

COit and also to bring excess profit if possible. The pnce th':- t(
-.mains the same witho ut furthe r chang es. A change malen
pri"'
,I

~ collec tive decis ion. The fear of losing marke t ~ ~ef \

~reas e_d, ~ot gaini ng much when price i~ ~~due ~ ' .
oligop ohst firm to stick to the price which they uuttally t t)\e .
the price becomes rigid or sticky. The demand curv ;.~ r,
price has a kink, hence the dema nd curve is called 1
 . ,,1 pt1 IY , 99
/1, d ,urve. 1 he degree or extent fof kink depends on th h
n c l tw o segments o the dema.nd curv . e c ange
.
l,,11•' . ; tics on t. 1e
cl:1st1 c.J es.
·u111 of a Firm
iJi l,l'l
qll .. f .
.ce output dec1s1 0n o an oligop • d 1n
oly firm is expl ame . p·g
0 d . . 1
eP ti·rms' deman curve 1s Kinked and thus the pri·ce . . 'd ·
J~ . IB~ .

Fig. 6.3

edemand curve is Kinked, having a kink at R. The corresponding

has a discontinued portion MN. The discontinuity is due to 'the
The discontinuity depends on the degree of kink which in
depends ·on the relativ~ elasticities of two segments of the
d curve. If the difference in-elasticities is large, longer is the
ontinuous portion of MR. Marginal cost (MC) curve passes
ugh MN (discontinuous) part of the MR and the equilibrium
ut is decided where MC cuts MR, producing the 0Q output.
corresponding point on demand curve decides the price i.e. QR
P. The increase or decrease in MC, i.e. a shift in the MC curve
~he discontinuous portion of the MR does not change the
tity produced and the price.

price thus determined remains rigid at the point of kink on the

of !~ur~e. If an oligopolist increases price over the portion ~f
t . kinky demand curve the rivals would not respond m
' t share for themseIves. The f ear
· a larger marke
ation of havmg
100 Business Economics - II (F. Y.B.Corn '•. sr-~A•
'Vl•1J)
ivals and the consequent loss of de
of non-response b Y the r ·
r r t not to increase th e pnce
· . Illa
un1lateraU l'ld
makes an o tgop_o ts d the price as a reduct' y, No
oligopoly £inn hkes to re ~~~ is inelastic. ton hardly
increases the sale as the detn .

f6.s -cotii:rsiVE .OiiCOPOiXl~<;li?IL· .~ , , / ·,;?

FORMATION
To avoid the price war and recognise the ~ignifica1:ce of dependency
and uncertainty of the situation .the oligopoly firms may have a
collusive oligopoly by forming a cartel. Cartels can be ~vert (explicit)
.or tacit (implicit). Orgarusation of Petroleum Exporting Countries
(OPEC) is an example of an explicit collusive oligopoly . .
In the case of OPEC, product (Petroleum) is homogeneous, producers
are few but cost of production possibly be different for each
producer. The price charged remains the same. Each producer~
allotted a certain quota of output. The profit earned by each firm
would not be the same as the cost and output produced would h!
different.
Collusive oligopoly takes the form of market sharing cartel or
tralized cartel. In the market sharing cartel each member gets
exclusive right to operate in a particular geographical area. Ina
tralized cartel the cartel decides the product pri~e, allocates
t among its members and determines the norms of profit
_ .......g. OPEC is an example of centralized cartel.

. ls ~~g agreement formed in secrecy, which may or ~ay

Ill w~iting, between the firms in direct competition with_.
• ..._!I"
m the market are the most harmful form of anti compebtl
g mess practices.
Fig. 6.4 explains the arrangements under centralised cartel.
 101
Firm B Industry
y y (Cartel)
AC 1 MC2 AC 2
f MCr

J:8 ·······----- .

~ -- -~ x o- -- -Q --
2
~x o~ -- -- Q .L _~ x
0 Ou tpu t
Fig. 6.4

ed car tel . Th e ind ust ry' s

The above fig ure ex pla ins the cen tra liz
nal cost cu rve (:~:MC), is de riv ed by ho riz on tal ly ad din g up
argi
d MC • Total
i.e. Mc ; an
e marginal cos t cu rve s of the tw o firm s. ind ust
2
ry MR.
.I:M C cut s the
utput OQ is pro du ced at a po int wh ere
liz ed aut ho rity . Th e fir m
emarket price at OP is set by the cen tra
t. 0Q1 + OQ2 _ OQ . Sa me
sells OQ1 ou tpu t an d fir m B, OQ2 ou tpu
rice is charged by the fir ms . Fir m A ma
ke s a pro fit of N 1S1T1P1 an d
m B pro du ces an d sells a
Beams N2S2T2P 2 am ou nt of pro fit. Fir
nt of pro fit . Th e car tel
ger quantity an d ea rns hig he r am ou
g the pro fit too.
th~rities can wo rk ou t no rm s for sha rin
ive oli gop oly ma y tak e dif fer en t for ms . Tra dit ion all y wh en a
llus
es age ncy wh ich ha d
I was formed the re ex ist ed a co mm on sal
ms wh ich we re pa rty to
sole right to sell the co mm od ity of the fir
oli go po ly is wh ere the
agreement. An oth er for m of co llu siv e
de ter mi nin g ou tpu t an d
. complet~ly su rre nd er the ir rig hts of
y. In a per fec t cartel, the
~o the Central Ad mi nis tra tiv e Ag enc
of eac h me mb er. It
auth ority de cid es the pri ce an d ou tpu t th
the pro fit s am on g . e
Works ou t the no rm s of dis tri bu tin g
~

d pro fit an d dec idi ng

distrjtpe. of cartel, the sh ari ng of ou tpu t an
fer en t me tho d. Tw o
hn Uhon of pro fit ma y tak e pla ce in a dif • b on -pr ice
Po rta nt me tho ds are ma rk et sh ari ng Y n
Petit1•0
na nd qu ota s.
102 B" si11css 1:cono11iics - If (F.Y .B.Com .: SEM -lf)
NO N- PR IC E CO MP ET IT IO N
In an oli go po l~ n:a rke t, pri ~e ren 1ai ~s
ri~ id du e to the fear about the 11)
rea cti on of the ir nva ~s. An inc rea se 1n pn
~e ~o uld no t be responded
bu t an y dec rea se wi ll be fol low ed by
. pn. S h f s1m1lar or at tim es a lar G \i
red uct ion 1n k f ·
ce. uc ~ar s mda e a ir°:'dst·lck to _a par ger
wi tho ut fur the r ch an ge s, 1n or er to avo tic ula r price ,
1 a po ssi ble price wa r.
Ol igo po lis ts, tho ug h av oid pri ce com
pet itio n, get ind ulg e in non-
pri ce co mp eti tio n or wh at is cal led
"C ove rt Cheating" . Such a
com pet itio n usu all y tak es the for m of
sec ret dis cou nts , additional ,
fac ilit ies , or an y oth er sec ret be ne fit to
the ret ail er an d/ or the final '
co nsu me r.
Pri ce ma y rem ain sta ble if the cos t
of pro du cti on is identical for
dif fer ent fir ms . Th ey all ma y ag ree to
ch arg e a mo nop oly price and
ear n ma xim um pro fit.
Wh en the cos t of pro du cti on dif fer s the
low cos t firms are tempted
to cha rge low er pri ce. In suc h a sit ua tio
n the car tel ma y break away.
Th ere for e the fir ms ma y no t. low er the
pri ce bu t res ort to non-price
com pet itio n wh ich ma y tak e the for m
of sec ret discounts, additional 1
fac ilit ies or an y oth er sec ret b~ ne fit ;

s to ret ail ers an d/ or final ,

con sum ers . 1

Qu ota : Un de r th~s sys tem , all the fir

ms un de r ~ligopoly reach~
eem en t reg ard ing the qu ota of ou tpu
t an d pri ce to be charged. L
co st of pro du cti on is the sam e for all
the firm s und er the car: )
the y wi ll ha ve mo no po ly sol uti on wh
ere by they charge ~ ,
im um po ssi ble pri ce an d sha re the
. Th e qu ota of ou tpu t tha t eac h fir m wo
ma rke t equal~y
uld sec ure m th th
~~t; el
pe nd s on its pa st rec or d an d ne
go tia tin ? ski~l. ~~e
sran gem en t co uld be of div idi ng the
ma rke
markets are thu s div ide d, the fir m is fre e t reg1onwise. . e
to dec ide the pnc
also int rod uc e ch an ge s in the pro du ct.
In the ab sen ce of bin din g ag ree me nt, the b und to t,r~
car te ls are O ostfir
If the cos t of pro du cti on dif fer s be tw een
the firn1s, the low .~r-,ar
are a l wa ys tem pte d to vio lat e the ru 1es. A d · 11"' '
s 1sc~sse d ear
. n,'1Y r\' ·
ma y sup erf ici all y ap pe ar to fun cti on
we ll bu t 1n reality \
 1 I( 1/)/ • •
l
,·1,<I
I •
r·1cttces to acquire advantage an d a .
Ii r '
103
f,1ril1t1, 1re profit. cquue larger market
ti' rn t1lL
t t'.1
111
' LS FORMED IN RECENT YEARS
,srE . . _
(. national V1tamms Cartel form d b
]llte\facturers of vitamins from Bel e_ Y all the leading
1. 0"1nL ' h g1um, Canad F
manv, Japan, t e Netherlands Sw·t . a, ranee,
1 1
Ger ated from 1989 to 1999. ' zer and and USA
0 per

Beer Cartel - Netherlands - 2007.

Glass Product - flat glass manufacturers GI - .

bl 1 . . ass is used as an
illFut in dou e g azmg and safety glass. The cartel was fonned
br manufacturers from Japan, (Asahi), USA (Guardian
(Pilkington) and France (Cobain). }, UK
Drug Cartels in Mexico and Colombia.
Cement Cartel - Argentina -1981-1999.

Pharmaceuticai, Steel and Crushed Stone -_Cartels in Brazil.

Broadband internet and landline telephone services - South
Korea.

Four airline companies - South Africa - 2004.

ost of the above cases, the cartels were fined heavily to bring to
d the collusion for earning excess profit through higher prices.
dia the products and services sold in the oligopoly market are
potential members for cartelisation. It is feared that airline
panies may enter into a implicit collusion for undertaking
on measures to reduce their cost (through retrenchment) and
se profit by increasing air fare.
nt, steel, tyre/ truck industries are alleged to have formed
it cartels.
· · for severe
Competition Act 2002 of India has provision
ent for cartels.
 of Pricew
In a free or ope n oligopo ly m.ar.ket there is alw ays a fear
which is beneficial for con sum ers but not the prod ucers. One f a,
com pe
r·
Itive
. tionOthe
situa •18
way s of avoidin g such an unn eces sary
·
·ch influ ence s or d eci.d es th e pnc e and th to
·
hav e a lead firm whi Us
. pn·ce •
.d 1ng
becon1es a lead er for d ec1

Ty~ es of Price Leadership

t forms. BclSed
Price leadership und er olig opo lr may take differen
leadership can
on the market situation and quality of the lead er, the
be categorised differently.
s in oligopoly
1. Dom inan t Firm LeadersJ::tip : One of the firm
proportion
market may hav e the adv anta ge of pro duc ing a large
its power
of total outp ut. Such a dom inan t firm can exercise
and price.
and influence ove r othe~s in dec idin g tota l outp ut
its product
Being a dom inan t firm it decides the mar ket price of
small and
based on its mar ket dem and . Oth er firm s bein g
and price
lack ing con trol and infl uen ce in dec idin g outpu~
ngly the
acce pt the dec isio n of the dom inan t firm . Accordi
sell it ata
rem aini ng firm s in olig opo ly adju st thei r out put and
pric e dec ided by the dom inan t firm.

Low Cost Firm Leadership : An oligopoly firm whi

ch enjoys
2.
~
the benefits of low cost of production, for whatever the reaso
may be, naturally has the advantage of becoming a leader_mth
the industry. It decides· the price which the other firm
s wi
rnar
higher cost of production accept. The leader firm however
e~
require to take care to set a price which must bring som
n~~
to the foIIowers. The higher cost firms will have no optio
to accept the decision of the leader and at the sam
e time fill
out ways and means to reduce their cost of production,
3• larometric_Price Lea der ship : A large, experienced
itl- ~
an:~
Mtpect.ed furn takes up the role of leadership. such
nat urally acq uire s lea der shi p bec aus e of its qualitc1
tll'
~ firm is expected to understand market, dee!~
an the basis of demand, cost of production, co.111,S...,

Jt•.";:.
op111Y • • ,..
J11 others, etc. A s tud1ed decision lake 10:,
fropcctcd to be followed by others. n by the leader is
ex
. ress ive Price Leadership : A larg d .
A~Sb)i shcs Jca dershi p through its aggreses· or ~01 •nant firm
cst,1 . · 1ve pnce pol 1· ·
· pcls other f1rms to accept its price pot · Th c1es. It
com • icy. e follo
Ve hardl y any option but to follow the d . . wers
ha cssive f1. rm. 1n th ea b sence of compliance byec1s1on
th f of the
ag
gr . f. . . e o11owers
he aggressive irm imposes its leadership by thre t . '
t . . f.
force the d1hant irms out of market. a enmg to

d r the price leadership other firms accept the price decided by

J:ader. The leader firm allows ~t~er firms to sell all the output
1they want to and meet the remammg market demand by selling
product.
price-leadership model is explained in Fig. 6.5.

I
I I
I I D
0 20 40 60 ' 80 100 )20
Output
Fig. 6.5
is th th product. ~MC ~ 1 is the
d curve of the
e market demand curve for e
. the .deman
gi. naJ cost curve 0£ all followers. DL ts revenue curve 0 f
1
_nant firrn or leader firm. MRL is the mar~~~eader. The leader
n~nt firrn. MC is the marginal coS t ~f t. (MC = MRJ ~t
w111 , L
t E set the price based on 1s eq
h . uihbnurn L
d the follower
swill
th~: The Price is f 6 at which the leader an
ir output. --- .
 ,n.
Bu sines s Economics - II (F. Y.B.Co ··SEM
106
e up to th e po in t w he re IM C • p . ·I/J
od uc
T he fo ll ow er s will pr , ?£_w hi ch 10
w ill be\oldr~~i.e.
po in t T. The total ou
tp ut w ill
ad
be
er
60
ch ar gi ng f 6, th e price set the by
th e le Y th,
fo ll ow er s an d 20 by ·
le ad er .
L ea de rs hi p
A dv an ta ge s of Pr ic e
b
s ac ce pt s th e price set Ythe
W ar : A s th e fo ll ow er
1. A vo id s Price s av o1 'd pn·ce w ar .
leader, ol ig op ol y fi rm
ion
in ty : F ir m s ne ed n o t un de rg o a situat
2. N o U nc er ta le ad er es ta bl is he s th e price.
of
un ce rt ai nt y as th e
e: N o ne ed to w or ry ab ou t the decisio~
ep en de nc
3. A vo id s In te rd ec t o f pn
.
ce . .
of ot he r fi rm s iri re sp
C os t : A s pr ic es ar e de ci de d by the leader
el li n g
4. Lowers th e S in g ho m og en eo us , th e selling co
st can
an d the co m m od it y be
g co st is co nf in ed to informative -and not
be re du ce d. Sellin
g.
pursuas~ve advertisin
p : T he su cc es s of price leadership
Leaders hi
Limitations of Price pr ic e le ad er is expected to be ful
ly
or s. T he
de pe nd s on m an y fact on . If th e le ad er is no t fu lly infonned
s reac ti
aware of hi s fol1ower rf ec t in fo rm at io n, th en the fir
m's
on on im pe
and takes a de ci si
ccessful.
leadership wilI no t be su
: T he fo ll ow er s m ay apparently follow
on
N on -p ri ce C om pe ti ti m ay re so rt to various non-pr
ice
le ad er bu t
g devices. They ma!
the price se t by th e
se cr et pr ic e cu tt in
competitive tactics or di sc ou nt s, favourab
le cre,dit
of hi gh er ra t~ of
be in th e fo rm rv ic e an d m an y other attractive
fr ee se
terms, po st de li ve ry er s. U nd er su ch circumsta
nces
iv es to th e cu st om
terms or in ce nt
io n m ay fi na lly le ad to op en price redu~on
a non price-competit ar e th us le ad in g to an open pnce
ar ke t sh
to protect one's ow n m
competition.
ti on : If th e oJ ig op ol y firms are seJlinl
P~oduct _Different ia
ts , th e le ad er sh ip be comes difficult, ~ h
~tfferentiated produc d co nv in ce th e cu st om e~
ad ve rt is in g an
firm ma~ resort to va ls ' go od , A variety of sellin8
to hi s ri
p~oduct is superior
. ,,,(,1 1/ d
1~l ca n be us e by th e fo llowe
· •• , 107
rs to e .
t,icll_~~such a sit ua tio n wi ll co mp
el the lea;e;1ra1:otheir ma~ket
sh,Jt .~n coin pe tit io n to pr otec
311 ope t his ow n ma rk t hto enter into
e s are.
·ff ren
01 e ce in Co b
st of Pr od uc tio n: Price lea de
h' b
cted to be as e d on low co st of rs .
1p y a firm is
pr od uc tion Th d
exfpl~A' cost en ab les th e fir m to
o Ot• h pl ay the ro le of a l~ade aHvantage
if tl1 e fo llo we rs av e 1
a ow er co st th en ev en for er. owever
. . a d .
firlll it beco m~s inc reasin g1y d'f f'
1 icult to ascertain the leaom mant
The low co st fo llo we rs m ay dership.
re so rt to va rio us no n-pr ice
ompetition. Th e lea de r ma y
ge t fru str ate d by su ch cove rt
~ractices. in du lg ed ~y t~ e fo llo
we rs an d finall y giv e up the
leadership. Su ch a sit ua tio n ma
y lea d to op en competition by
all the firms.
If the price lea de r ha s a hi gh er co
st th en the lea de rship may
not be effective. Th e lea de r is bo un d to set
cover his cost. Hi gh er pr ice ma
a
hig he r pr ice to
y att rac t ne w en tra nts wh o may
not accept th e pr ice se t by th e
lea de r. Ev en the existing firms
may be tem pt ed to en ter in to a
no n- pr ice co mp eti tio n to wi den
their market.
·
pies of Leadership in Ol ig op ol y
M arket
Commodity/ Se rv ice
Leadership Firms
· e M ark eti ng (In dia ) Am az on , Sn ap de al, Flipkart
. e M ark eti ng (USA) W al- M ar t
SAIL, TISCO
M c Do na ld
P and St yli sh Fu rn itu re Ik ea (S we dis h Fu rn
itu re Re tailer)
Industry
Ge ne ra l M oto rs
Industry (In dia ) M ar ut i - Su zu ki
Drinks
Co ca-Cola, Pe ps i
there . .
are more than one firm it ind icates th at all the firms are
t'1 '
~& to establish their leadership or each f 1., ~uccee dCLt m
one u · .
·
ing its leaderslrip at different tim
es .
 ,,,.
108 Bu ~in e.'>s Econo mics - II (1-'. Y.B.c, 5
·· '-~-,,.
A comparison between M on op oly, Monopoli~tic Comp
@tittnr. •ri~
Ol ig op ol y

M on op ol y MonopoliRtic
Characteristics Co.m pe tit ion
Many
No . of se lle rs Si ng le
Di ffe ren tia ted Hornogene01J,
Na tu re of Un iqu e
or
co nm 1o dity
Differentiated
Price ma ke r Can in flu en ce Can influen ce
~f ark et po sit ion th e pr ice the price

Single or Di ffe ren t Single or

Na tu re of price
Di sc rim ina ted pr ice s Different Pric
Less ela sti c M or e ela sti c Kinkin
Na tur e of
d~mand CUrve
de ma nd
Excess No rm al Excess
Long-term
profit
No Fr ee Free but
En try to the difficult
ma rk et

cteristics of oligopoly.
1. Explain the me an ing an d chara
n in oligopoly.
2 Discuss the price rigidity sit ua tio
ss the pri ce rig idi ty sit ua tio n in an oligopoly market-with
3. Discu
.
help of a kinked de ma nd curve
4. plain the eq uil ibr ium of an oli go po ly fir m facing kinked
Ex
curve. .
ca rte ls an d their effect&
5. Discuss the reasons for fo rm ing
in the typ es an d limitatlollld
6. What is price lea de rsh ip? Ex pla
leadership.
7. Write sh ort no tes on :
ive Ol igo po ly ·
(a) ColJusive an d No n-C oll us
(b) Kinked de ma nd cu rv e
(c) Price leadership
 /V . . ·... ... ,. ,,.,,.,•.r,•,s~~·--· ..,.,...,-,, •. ·····•·,·,,-..,.,,.,,,. ~· .

it ,~"i>B1Ecr1vE QiiESTiONs--~-
11
''.: .•-
7
),ether the following statements are true or f .h
Sta te w s·
a1se wit
eason · · · f t t k ·
r 0 oly firm is re~ o a e its own decision abo t .
AJ1 Jigop u pnce and
tp ut. f h d
oll . opolist does not ave a eterminate demand curve.
,.,1 ohg db . . . .
r
rv tel is forme y o1igopo11sts to avoid price-war.r .
Acar ·ce competition is absent in oligopoly.F
Non-prt . . .
. . very flexible m oligopoly. F
~ieffi . .
The }<inked demand curve has discontinuous portion of MR. r.
Acartel is an example of non-collusive oligopoly. F" ·
,.

··False; For Reasons: Refer Section 6.2.

True; For Reasons : Refer Section 6.3.
True; For.Reasons : Refer Section 6.4.
False; For Reasons : Refer Section 6.4.
false; For Reasons : Refer Section 6.3.
True; For Reasons : Refer Section 6.3.
False; For Reasons : Refer Section 6.4.
Choose the correct option and rewrite the statements :
Which of the following is not a characteristic of oligopoly?
(a) Firms are interdependent
(b) Few firms dominate the market
(c) The demand curve of a firm is indeterminate
~ Only homogenous products are sold
In--oligopoly, the commodity sold are homogenous.
~ pure . (b) mixed
(c). impure (d) standard •
ll'hich of the following sectors in India
ltlarkets? .
is characterized by oligopoly
(a) A .
gricultural commodities (b) Retail
. Automobiles (d) Hospitality
) C~f the following statements is true about oligopoly?
E try of new firms is possible and easy
Entry of new firms possible but difficult
ntry of .
p·1 new firms is not possible
llns a
re not allowed to exit
110 Business Economics • II (F. Y.B.Com ... SEM,
11
5. Interdependence of firms in oligopoly is the result of )
(a) Existence of a large number of firms
(b) Government regulations
.Jp}" Existence of a few firms (d) Easy en~ry of new firrns
6. Interdependence of firms in oligopoly results m
¢' uncertainty regarding reaction ~f riv~) firms
(b) certainty regarding reaction of nval firms
(c) determinate demand curve
(d) price flexibility
The demand curve faced by a firm in an oligopolistic market is
7.
(a) downward sloping (b) horizontal
Jct- indeterminate . (d) vertical
Which of the following is a form of non-price competition?
(a) Advertising (b) Service quality
(c) Product quality Ja1'
All the above
_ _ oligopoly comes into existence when firms work together to
reduce uncertainty in the market.
(a) Non-collusive (b) Non-competitive
JPY Collusive (d) Pure
_ _ takes place when all firms in collusive oligopoly try and control
supply.
(a) Price flexibility ,M' Price fixing
(c) Price control (d) Price reduction
Price fixing in oligopoly takes place when,
.J,lf'
a few large firms dominate, demand is inelastic, market demand
does not fluctuate
(b) no firm dominates the market, demand is elastic, market demand
fluctuates
(c) a few large firms domin.ite, demand is elastic, market demand
fluctuates
(d) no firm dominates the market, demand is inelastic, mark
demand fluctuates
·Which of the -following is a feature of collusive oligopoly?
(a) Firms do not co-operate with each other
dJ1(' Firms co-operate with each other
(c) Price competition takes place
(d) Beneficial to buyers · 1
l3. Which of the following is a feature of non-collusive ougopoiY
(a) Firms co-operate with each other
(b) Beneficial for sellers
 111
. ,,,,/ 1/
1~11 _ • MaY take the for1:1 of cartels
(d 1 • ·e war is possible
) I rt<--
JJ . iing to the . kinked demand curve model' a firm• w 1·lJ assume
A·t Otl
, l · ,·vaJ fin11s w1
11
. constant
th1' tt1keep their pro d uctton ·
(cl) keep their prices constant
~:~ match price cuts bu t not p rice in creases
i~) atch price increases but not price cuts
(d 111ncept of kinked demand curve is associated w ith
~)ero .
paul Sweezy · · (b) Augustin Curnot
~) I-!einfich Stackelberg . (d) E~ward Chamberlin
'[he kinked demand curve m non-collusive oligopoly is the result of
(a) price fle~i~ility · ·
(Pr' price ngtdity
(c) same price for all levels of output sold
{d) price regulation by the govemm~nt
The primary objective of cartel formation is
~ to avoid price ~ar ..
(b) to carry out pnce competition
(c) to benefit buyers
(d) to follow government regulations
Governments discourage and -prevent cartel formation by firms in
order to ·
protect the interest of the sellers
earn revenue
protect the interest of the buyers
(d) promote exports
In a . cartel, each member gets the e~clusive right to operate in
particular geographical area. · ··
) · decentralized . Jl'1" centralized

:s~
\ competitive (d) standard
ty~ of cartels the sharing of output and profit takes place
) g. which of the following methods? ·
) M Price com pe t·t·
1 10n .
(b) Governn1ent regula tions
arket com petition
Non-pri .
ich la . ce competition and quotas
Inct·w in India specifically prevents the forn1ation of cartels?
Corntan Bank
. ruptcy and Insolvency Code 2016
C PanJes Act 2013
0
Inperr
110n Act 2002 (d) Patent Act 1970
 ,Co
Bu sin ess Economics - 11 (F. Y.B
112 "1.: Sfh,j,
m in an t fir m pr ice lea de rs hi p model, 1-~
22. Un de r do al
, la rg e pr op or tio n of tot
J a } a fir m pr od uc in g a ~a rk et s~
decid es th e m ar ke t pr ice
ar ke t price Ppf}
st fir m de cid es th e m
(b) th e lo we st co
p ric in g str ate gy decides th
(c) a fim1 wi th aggressive m ket DP;_
decides the rn arekretnarh..:
ted an d ex pe rie nc ed fir
(d) a re sp ec .ce le ad er sh ip. m od el, r• 1ce
·· ~

23 . Un de r ba ro m etric pn -. k
la rg e pr op or tio n .of total &&lar et suPPly
(a) a fir m pr od ucin g a . ._
deci de s the m ar ke t pn ce
) th e low es t co st fir m de cid es th e m ar ke t price
(b
th ag gr es siv e pr ic in g str at eg y decides the ~ k
(c) a fir m wi rket ~tprjC@
} re sp ec ted an d ex pe rie nc ed fir m de cid es the ma
Jd a e
th e fo llo wi ng is an ad va nt ag e of pr ice Ieadership~nc
24. Whi ch of
(a) Is possible un de r pr
od uc t di ffe re nt iat io n
ib le if th e co st of pr od uc tio n of the leader firm is~
(b) _ Is poss gh
Jc} A vo id s pr ice w ar
co st
(d) Does no t affect se lli ng (c), (B)-(tl),
(7 )-
, (2) - (a ), (3) - (c) , (4) - (b), (5) - (c), (6) - (a),
An s.: (1) - (d) (14) - (c), (15). (a).
(c), (10 ) - (b) , (11 ) - (a ), (12) - (b), (13) - (d),
(9) - ) - (c), (22)-(,A
, (17 ) - (a ), (18 ) - (c) , (19) - (b), (20) - (d), (21
(16) - (b)
(23) - (d), (24) - (c)
Match th e fo llo wi ng :
Co lu m n B
Co lu m n A ♦
uc ts (a) No n- pr ic e competition
(1) In ol ig op ol y_th e pr od
(b) Differentiated I
ar e m os tly
J?oly (c) Ki nk ed de m an d curve'2.
(2) Price rig id ity in oligo
(d) A vo id in g price war ~
le ad s
at (e) OP EC
(3) Pr ice le ad er sh ip ai m s
nt
(4) Hi gh er ra te of di sc ou
)
Ans.: (1) - (b), (2) - (c), (3 ) - (d), (4) - (a
fe w se lle rs of ha nd se ts an
d
m ar ke t in In di a ha s
Telecom
D.
er e is ke en co m pe tit io n be tw ee n them. The
pr ov id er s: Th .1
nc e Jio ha s m ad e th e m ar ke t m or e co m pe tit iv e.
Relia
th e m ar ke t str uc tu re of te le co m in du str y in India·
(i) W ha t is ma rk et 7 .
ty of pr ic e w ar in th is
(ii) W ha t is th e po ss ib ili pJaill-
Ar e th e pr od uc ts ho m og en ou s or di ffe re nt ia te d? sx
(iii)