MASTER OF BUSINESS ADMINISTRATION

SUBJECT: Managerial Economic

Lecturer : ABHISHEK SINGH
STUDENT : KUCH SARAL

Assignment-5

Pricing in an Oligopolistic Market: Rivalry and Mutual

Interdependence
- Oligopolistic is a market dominated by a relatively small number of large firms
- Examples of Oligopolistic Industries such as Airlines, Soft Drinks, Doughnuts, Parcel and
Express Delivery
- Noncooperative Oligopoly Models. The kinked demand curve model of oligopoly
incorporates assumptions about interdependent behavior and illustrates why oligopoly
prices may not change in reaction to either demand or cost changes.
- Mutual Independence: relatively few sellers create a situation where each is carefully
watching the others as it sets its price
- Price leader: one firm in the industry takes the lead in changing prices, and assumes that
other firms:
o Will follow a price increase
o But will not go even lower in order not to trigger a price war
- Non-price leader: firm that leads the differentiation of products on other, non-price
attributes
Competing in Imperfectly Competitive Markets
- Non-price competition: any effort made by firms in order to change the demand for their
product
- Non-price determinants of demand:
o Tastes and preferences
o Income
o Prices of substitutes and complements
o Number of buyers
o Future expectations of buyers
o Financing terms

The Reality of Monopolistic Competition and Oligopoly: “Imperfect”

Competition
- As a way of dealing with the possible blurring of two types of markets, monopolistic
competition and oligopoly are sometimes put together into one category called imperfect
competition.
- Monopolistic competition, a market with firms that sell goods and services that are similar,
but slightly different.
- Oligopoly a market with only a few firms, which sell a similar good or service (These companies
sell a product or service that may or may not be completely standardized, but is similar enough
that they’re in competition).
- Examples: the reality of imperfect competition:
o Auto industry
o Small retailers
o Global credit card issuers

Strategy: The Fundamental Challenge for Firms in Imperfect

Competition
- How does industry concentration affect the behavior of firms competing in the industry
- Strategy: the means by which an organization uses its scare resources to create to the
competitive environment in a manner that is expected to achieve superior business
performance over the long run
- Strategy is important when firms are price makers and are faced with price and non-price
competition as well as threats from new entrants into the market.
- Managerial economics: The use of economic analysis to make business decisions involving
the best use of an organization’s scare resources
- Industrial organization: studies the way that firms and markets are organized and how this
organization affects the economy from the viewpoint of social welfare
- Structure-Conduct-Performance (S-C-P) Paradigm: Says structure affects conduct which
affects performance
- The “New” Theory of Industrial Organization: says there is no necessary connection between
observed industry structure and performance that uniquely leads to maximum social welfare
- Porter’s Five Forces, illustrates the various factors that affect the ability of any firm in the
industry to earn a profit. This tool identifies five forces (Supplier power, Buyer power,
Competitive Rivalry, Threat of Substitution, and Threat of New Entry) that determine the
balance of competitive power in a marketplace. This tool is very useful for understanding the
competitive environment in which you plan to operate. If you know where power lies, you can
take appropriate advantage of a position of strength, or improve a weak situation.