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OLIGOPOLY ANDBUOPO
e haveso far discussed wherethere is a very large numberof producers supplying a Market as unde:
perfect competition, or a single monopolist an individualor a single group of individuals, dominats
the entire market, or there are many producers as in imperfect competition but not as many asin
perfect competition.
Butothersituation mayalso arise in the real world. One is that there may be two monopolists instead ofwm:
who share the monopoly power. This is called Duopoly. The other is when more than twoora fewsellers a
found in a monopolistic position. This is called Oligopoly.
__Jmportantcharacteristics of an oligopolistic situation are(@)Every seller can exercise an importantinfluence
on the price-output policiesofhis rivals. (4) Every seller, therefore, is so influential that his rivals cannot ignore
the likely adverse effect on them of a given change in the price-output policy of any single manufacturer.
) This rival consciousness, or the recognition on the part ofthe seller of the fact of interdependenceis the mos
important feature of oligopolistic situation. (d) The demand curve under oligopolyis indeterminate as we shel
see, because any step takenby his rivals thay change the demandcurve.It is more elastic than under simply
monopoly andnotperfectly elastic as under perfect competition.
As compared with perfect competition, the numberof firms in an oligopoly is much smaller. Oligopoly
differs from monopoly and monopolistic competition in this that, in monopoly, there is a single seller, 1
monopolistic competition, there is quite a large numberof them: and in oligopoly, there is onlya small number
of sellers.
Wediscuss these two marketsituations at some length below :
DUOPOLY i
Duopoly maybe of twotypes : (a) Duopoly without /
product differentiation and (b) Duopoly with product
differentiation.

i Duopoly Without Product Differentiation

Under duopolythe simplestcases will be those where
the two monopoiists are supposedto beselling an identical
commodity andthere is no product differentiation. Very
likelythere willa collusionbetween the two. They
may agree on a price, or assign quotas ordivide the
territory in which each is to market his goods. This will See two sellers:
specially be the case if their respective cost curves are pepe
identical or nearly so, andif the demandis stable and less
. . . . ee
pate”
elastic. Obviously, this collusion creates conditions almost analogous to a monopolyand the price i
Tee y orl

will be similar to that under monopoly. .

eeeeeeesSsSsSSSSMHhH

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 Incase,however, there 1S NO agreement between
the two, a constant price war will be the most probable
consequence. The important factors to be considered
then would be the costs and gains in driving out the
rival, the relative sizes of the two firms, the demand
elasticity and mobility of the purchasers, the
promptitude with which the rival reacts to changein
the other’s policy and the extent to which price
concession can be kept secret, and so on.

If there is no product differentiation andgoods

are
es
identical, the consumers
See
are indifferent between
scone
thetwo producers and the sameprice mustbecharged
by both in the long-run, otherwisethe one charging
more will not be able to sell any. They mustfix a price
as if they were a single monopolistrolled in one. Only
in that way they will be maximising profits.

casethereis a price is a price-war between them,

theywill be able to earn only normalprofits as under
pertect competition. If their costs are __different,theone
"ithlower costs willsqueezeouttheother andasi mple
wo ul dbe est abl ish ed. The bes t cou rse for the
“Monopoly TeaPrey

Cuopolists will be to fi
the market and prof x the monopoly price
its. and ome

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 It is possible that, in the short-run, duopoly price
may be lower than the competitive price, none
of the
producers earning normal profit. In the long-run this
price may be somewhere between the monopoly price
and the competitive price.

DUOPOLY MODELS
[ Cournot Model
The following diagram illustrates the Cournot
model. It shows how A and B producerssharethetotal
market and adjust output (not prices) and how they
maximise their profit.
yA

S
PRICE

\ :
L KR

O.
\ A ise Ady: i:
ay
OUTPUT
Fig. 30.1.
In this diagram (30.1) SB is the total oe
Let the unit cost be zero ie. MC = O. Therefore,
IS also zero. MRis zero at A.

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 (Before B enters the market, A produces OA= +4
AB. Theprice is OC giving maximum profit OAPC.|
Then-B-enters the market and produce ‘AH s.c. 5 AB
. _ 1] “ae
the remaining market, or 4 OB. The price falls from
OC to OZ. B gets total profit AHQP. A’s profit falls
OAPC to OARZ,thetotal profit being OHQZ.
When B produces AH which is { of the whole, the

total output left for A is5 (L- J = 2. Whatis left

over by A and which now B produces is
-( _ 2) =5/16. A may now react by producing
(1 — 5/16)i-e.11/32. This process will continuetill
equilibriumoutput_and_price.are achieved. As more
and more firms enter, they will produce output
approaching the competitive output. If the number of
firmsgoesuptoNtheywillproduce _(N)OB.
N+I1

fl Edgeworth Model
The basic difference between this model and the
cournot model is that in Cournot model, the output
(and not the price) of the rival firm is assumed to
remain unchanged. Here, the rivalfirm_is-supposed
to keep the price unchanged. ,

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 The following diagram (Fig. 30.2) illustrates the
situation. It is assumed that each producer’s capacity
is limited to 3/4th of his entire market and each is
confronted with his own demand curve made up of
one half of the consumers. The maximum output that
A can produce is OB and B can produce OB’,
D

Ps
O
Hf B OUTPUT aT
- Fig. 30.2.
The demand curves of A and B respectively are
DT and DH. A first enters the market andsets his
price P, he sells the total output ap,. Then B enters
the market and sells at price slightly lower than A
and thus captures his market. B then sells the whole

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 Modern Economic Theo
ere ENTREMETS:
fi e
8 i
: i Saeed tas oo per 8
Ee SPS
s
|TT a|
a es Ss lil Mgr NE

output at P, and snatches from A bb’ of sales. Now A

reacts and captures B’s market to the extent of CC’.
This process of price-cutting, continues until one of
them say B fixes his price at P,. At this point none
can snatch the market from the other by lowering the
price. Then raises the price back to p, tO maximise
his profit from his share of the market knowingthat
B hasalready thrown his entire supply. B then follows
suit. There is thus continual oscillation of price
between P, and P, i.e. the upper and lower limits.

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] Duopoly With Product Differentiation
Whenthere is product differentiation, each
producerhas his ownclientele and goodwill. Thereis
no fear of immediateretaliatory measuresbytherivals,
if one producer changeshis price-output policy. There
is less dangerof price-war. Therewillbenoagreement
between them. Since products are not similar, the firm
with better products can earn supernormalprofits.

OLIGOPOLY
f Oligopoly WithoutProductDifferentiation
Under oligopoly, the pricing theoryis
fundamentally the same as in duopoly with this
difference that the larger the number offirms the greater _

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 will be the differences in marginal costs and more
remotewill be the possibility of collusion or agreement,
whethertacit or explicit. The elementof predictability
as regards the proper scale of advertisement research
investment and returns is almost missing. The
temperaments of entrepreneurs, whether pessimistic -
or optimistic, makethesituation still more complicated
and obscure. Since they all deal in a standardised
product and each is producinga considerable portion
of the total output, the price and output policyofeach
is likely to affect the price and output policy of each is
likely to affect the others appreciably,. butnone can
ee

foretell preciselyhow. “The price which will be fixed

in oligopoly without product differentiation is thus
indetermination butis likely, in general, to be lower, »
the larger the numberof producers, until in the end
there are enough for a perfectly competitive
equilibrium to be reached.”

AOligopoly With Product Differentiation

In case there is productdifferentiation, monopo
ly
agreements are evenless likely. Sinceproducts
are2%
sumuar,-any producerin oligopolyraiseorJowe!
lspricewithoutany fear of losingcustomers
Immediat e reactions from his riva
See ye re TO

ls. Cut-thro™
competi on isunlikey, However, keen rivalryamo”e
them may ie create condiao tion of monopoles tic
compe
ercltitio e n. ThePrice, in the long-r
un, mayset: tle -
° Ps
a

etween the monopoly

-Of Oemaspen
price thatin a
“==<OMpetition.
throat ts cece

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Jst ab il it y of Pr ic e u n d e r Ol ig op ol y
It is often noticed that price under oligopoly jg
stable. It is neither much responsive to changes jp
no r to ch an ge s in su pp ly . Fo rin st an ce , if
demand
sethe
demand increases, firm_willventureto rai
efo rfe art ha tot he rfi rm sm a y notr ai set he pr ic e
pric
and it may lose the market. Nor will it lower the price
<
——_—s
- ante I OPELDLLEE OIE LOEIL
ile

for the fear that the other firms may also lowertheir
price and deprive it of any initial advantage.
Similarly, changes in costs, too, do not much
affect priceandoutput.underoligopoly.Forinstance
if wages have gone down,each firm mayliketo reduce
the price but it is not sure if others too will not lower
theirs. In competitive industry, action of nosingle firm
can affect the conditionsin the industry, for the number
of firmsis very large. But underoligopoly,the numbet
of firms is very small and any step taken by any ol
firm is likely to produce some reaction on the others
As Tarshis remarks. “Thus it is quite possible ua
demand andcost to change frequently and yet ©
Produce no change, or at any rate very few chang
In price. Thus, the existence of oligopoly accounls

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for some of the price inflexibility that characterises
our economy.”
The oligopolist avoids experimentin g with price
changes. He knows that if he raises the price, he wil]
lose his customers and if he lowers it he will offend
nis rivals. He has a clientele of his own when thereis
product differentiation. Why should he experiment?
He is, therefore content to leave the price and output
as they_are.

[| Price Rigidity
Very often the question arises why.theprices.in
oligopoly market are fixed for a longer periodof time_
or they do not fluctuate moreasinthecaseof
monopolistic competition. Here it is not the question
of the number of competitors. One gf the distinct
features of oligopoly market is that if the leader
increased theprice,the other follower’sdonot.so,
where as if the leader.decreases.theprice,other
producers also reduce the price.”

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{Gains Sve
eth) |

SS
P S
© a
pa
D

O o. Q O OO —

(a) QUANTITY (b) >

‘dE’ is the ‘demand’ segment of the leaders

individual demand curve where as ED is the
‘market demand’ curve segment. Letusassume
the prici
e s‘OP’ and the quantity offered as
‘OQ’. Price ‘OP’ is fixed on the basis of the
leadership concept.
—1. If the leaderincreasestheprice from
e gain tothesellerwall
the
‘QP’ to ‘OP.’, than_th
OPEKP,whereasthelosseswillbeCIE Q,QEae.
gat TTT

(Fig. a).
D.,If the oligopolist firm_decreases_the
pricefrom ‘OP to OP,’, the quantity ssoldwill
increase from0to ‘OQ, but the gain is
,Q Hw he re lo ss es .s il l be DI PE E;P.,.
UE,Q
anthe
IS shows. that STssesare_more th
gain. ae i

J :
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 Oligopoly andDuopoly 329.
O«.o-Sereeeon ee -
ee ee ae Petes LEE EE ON TID

Total Original Increase in Decrease in

Revenue price Price OP, Price OP,
OP (Case I) (Case II)
OPEQ| OOP.E,Q, OP,E,Q,
Gain — PE, KP E,Q,QH
Losses |- EQ, QE PEE,P,
Result |- EQ, QE > PEE,P, >
PE KP E,Q,QH

This clearly indicates thatin both cases_viz.

increase and decreasein prices the oligopoly firm iS
pee re“oss es_an dgai nJess
about to bear more losses and gaini
. Henc ethe
WIN RD mr ng Ee

prices are generally rigid or sticky.

One of the important difference between
the oligopoly and monopolistic competition is
that of huge amountofinfrastructural investment.
Where the numberof firms are less, it is
due to
the requirement of heavy capital invest
ment and
that too for a longer period of time
.

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 KINKY DEMAND CURVE f
It is impossible to find a single generalised
solution to the problem of oligopoly pricing. This is
becauseofthe difficulty of knowing the exactposition
of the demand curve facing a firm underoligopoly.
This in turn is due to the factthat the effect of a given
price changebya seller on the demandfor his product
depends very muchon thereaction ofhis rivals and,
as we explained earlier rival consciousnessis a basic
characteristic of oligopolistic situations.
Asfor the possible reactions of the rivals, there
can be any numberof hypothesis. Under some
circumstances, a price cut by a seller may pass
unnoticed by his rivals; at other times, it may invite

Y
PRICE

‘S
O ouTPpuT N

R
Fig. 30.4. Kinky Demand Curve.

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immediateretaliation,so that the position and the shape
of the demand curve of a firm under oligopoly will
vary with the hypothesis that we adopt about the
reaction to its moves on thepart of the rival firms.
There is, however, oneparticular shape of demand
curve under oligopoly which has become very popular,
i.e., the kinky demand curve. This curve1is drawn on
the assumption that the kink in the cu lways at
therulinpriceg ((Taking the ruling =given 1
t as umes hattisein price (beyondtheruling price)
go Sumomtaurn cat” oom

onthe part of a given|firmunder oligopoly,\ willnot

Se ariwae LeshS

EOS27 Te

invite retaliation from therivals,Le., theywill not come,

IO LEONIIE,
RIEL LAPIN EDOLS LILO SET OS EOE F

forward with a price increaseoftheir owntoneutralise

py ORR TET NS
LTTETONEE OLGA Te

theeffects of priceiincrease bythe firstseller. Rather,

theywill allow him toraise his price and lose customers
LEED ETORT 4 ae Pee Ser ee,

to his rivals, sothat theupperpartof the curve is more

aeeSSLOA SOIT

elastic
thanthe part «ofthelecurve lyingbelowthe kink.
This is becausea price cut (below the ruling price)
will invite immediateretaliation from the rivals who
wish to protect their own sales.Theresult will be that
if a firm under oligopoly lowers its price, it cannot
push up its sales very much because the rival firms
also follow suit with a price cut, so that there are no
customers to be drawnfrom therivals. Hence, the lower
partthedemand
curveisless elastic than theupper
one. —
Se oe

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ae

Having drawn the demand curve, we can draw

the corresponding marginal revenue curve (MR) (Fig.
30.1). We shall notice that there is a discontinuity in
the marginal revenue curve just below the point
corresponding to the kink. Next we can draw the
marginal cost curve (MC). The equilibrium of the firm
will be at the pointwheremarginal revenueequals
DUE ee eee poet

marginalcost.We shall further notice that, because of

discontinuity in the marginalrevenue curve,shifts in
the marginal cost curve between the points T and_S
will notalter the equilibriumpositionasregardsoutput
and prices. The firm helps to explain an often observed
phenomenon under oligopoly described earlier that
despite considerable variations in cost and demand,
the price under oligopoly remains unchanged.
The kinky solution as given aboveis only one of
the possible solution of oligopoly pricing and a number
of variations are possible. This solution, therefore,
cannot be accepted as ageneralised solution. Indeed it
is no solution at all, because we start with the
assumption that the kinkis always at the ruling price,
which is supposed to be, therefore, already known.
But if the price is already known, whatis there to be
investigated? of course, the kinky solution offers an
explanation of ‘Sticky’ prices under oligopoly, butthis
can be explained in many other ways also and we need
not, therefore, labour too much on kinky solution for
this purpose alone.

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PRICE LEADERSHIP UNDER
e OLIGOPOLY a.
In an oligopolistic situation, there are more than
two or a few sellers who are able to exercise
monopolistic influence. In sucha marketsituation,we
generally find that there exists whatiscalled the ‘price
leadership’. Under price leadership, one firm assumes
the role of a priceleader and fixes the priceof the
productfor the entire industry. The other firmsin the
industry simply follow the price leader and acceptthe
pricefixedbyhimandadjust their output tothisprice.
Theprice leader is generally a very large or a domunant
firm or a firm with the lowest cost of production. It |
often happens that price leadership is established a5 4
result of price war in which one firm emergesas the
winner.

Thus, we find that in an oligopolistic ma*"

situation, it is very rare thatprices are set independent!
and there is usually some understanding amone
.
oligopolist is operating in the industry- The
understanding or agreement may be either
ta
formal. In the case of a formal agreeme”! a
oligopolist agree to observe some rules of condut
@ wiil - |
regards price, output, etc. They may have
-
agreement which may also provide for yiolatio! ration ©
agreement.

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 “Of
ARLOUIEME
i mo,
However, generally the agreement
than formal. Thetacit agreement implies that Ct ©Lagi
Oligopoligy. &e
no consultations or discussion; the
only an understanding among themselves and | have
Olloy
a uniform and agreed policy with regard to
ch en
output, efc. It is this tacit agreement Whi
feature of price leadership. Thatis, unde ly 4
leadership there is no formal agreement oy, CttinPrigg
of an agencyto control and regulate the activitic up
the firms in the industry. Sometimes, however =
leadership may emerge from a formal agreement ie
the rival firms in whicha leaderis chosen whom i
other firms in the industry agree to follow ip Sting
the price.
Dominant Firm. A dominant firm jc One
which has a large capacity to produce andsel]
In the
market. In oligopoly such a practice is possible.| isa
very efficient and effective firm as such can dominate
the market, it can produce the goodsat possible lowes
cost then the other small firms exists in the market
We assumethat the dominantleaderhas the knowledge
of the supply of small firms as well as the total demand
for the product in the market.
P,L, is small firm’s supply ‘L,K’ is leaders
supply. The total ‘DD’ (for the product) and ‘SS’ is
small firm’s supply curve. The point of interaction

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 OligopolyandDuopoly = 331,
geeremine sete many,

| SLD ER > See MCBret ad Ca

! s
a
P 7 |

[, K, ; £ \ K,. |
atety te
PRICE

P, a
oo

3
a i
H
ee
Va
U8

|
Beret AR,

O L, 2, 0 Q
QUANTITY QUANTITY
Fig. 30.5. Price leadership by dominantfirm.

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 between DD and ‘SS’ at ‘K’ and the price determined
will be ‘OP’. At this point the dominant firm is not
able to sell any amount. At “OP,” price at which the
supply curve of small firm cuts the y-axis, butthis
price is not profitable to the leader, as its amount of
profit may be less (which is explained in other
diagram). If the dominant firm operates at OP, price
then the leader may sell ‘LK,’ amountof out put and
‘P,L’ may be left over to the small firms. This also
may not maximise the profits of the dominantfirm. At
price ‘OP,’ the dominant firm leaves ‘P,L,’ = OT,
amount of output for small firms and the remaining
LK, = T,Q, amount ofoutput is sold by the dominant
firm. This output level is the level at which the
dominant firm maximises theprofit. It is the point at
which MR = MC point of equilibrium of dominant
firm whichis explained in the right hand side diagram,
which is equal to ‘OQ’ or ‘PK’ and (in the main
diagram itis [(L,K, = T,Q,)].
There are several types of price leadership. The
lollowing are the principal types:

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 oe Price Leadership of a dominant
Firm. Underthis type of price leadership, it is found
that there is generally one firm, among the firms
Operating in the industry, which producesthe bulk of
the productof the industry. By virtue of this position,
tis able to dominate the entire market. It sets the
price
and the other firms simply accept this price. ‘The other
lirms are notina position to exercise any influence on
the market price. Naturally the dominant firm,
“onsidering its own interest, fixes a price so as to
“aximize its profits. The other firms have to adjust
their outputto the price so fixed by the dominant firm.

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 b)Barometric Price Leadership. Under
this type of price leadership, an old, experienced and
the largest firm assumesthe role. of a leader,but
undertakes also to protect:the interests of all firms
instead of merely promotingits owninterest. In a way
it acts as the custodian of firms operating in the
industry. It fixes a price which is found to be suitable
for all the firms in the industry. This price is fixed by
taking into consideration the market conditions with
regard to the demand for the product, cost of
production, competition from the rival producers, etc.
Since the interest of all firms are protected by this
dominant firm, all the firms~in the industry are only
too willingto follow theprice leader.
“oo.Exploitative or Aggressive Price
Leadership.In this case, one big firm comesto
establish its supremacy in the market by following
aggressive price policies. This firm compels other firms
to follow it and accept the price fixed byit. In case the
other firms show any independence, this firm threatens
them and coerces them to follow its. leadership with
the result that the price set by this firm comes to be
accepted willingly or unwillingly.

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 ~s aaeenemry:
ww wo

Price-output Determination Under Price

Leadership
Economists have developed various models
concerning price-output determination under price
leadership on the basis of certain assumptions
regarding the behaviour of the price leader and his
followers. We take a simple case here to show price-
output determination underprice leadership on the
followingassumptions:—(a) Thereare only two firms
A and B andthe firm A has a lowercost of production
than B:-€bythe product of the firms is homogeneous
a

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 th at th e co ns um er s ar e in di ff er ent as
or identical so
have —
between the firms; (eyboth A. and B
e ma rk et ,. |
i. e. , th ey ar e fa ci ng g th e sa me dem
in th
h wi ll be half of th e to ta l ma rk et demand
curve whic
curve.
wa
PRICE & COST

O NM | x
QUANTITY
Fig. 30.6. Equilibrium Price-output Under Price
Leadership.
The preceding diagram illustrates price-output
determination in this case subject to the assumptions
given above.
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 ng each
In this figure DD is the demand curve faci
the
firm which is half of the total demand curve for
product, MR is the marginal revenue curve of a
firm. MC,is the marginal cost curve of firm A an
MC,is the marginal cost curve of the firm B. Since
we have assumed that the firm A has a lower cost of
production than the firm B, MC,is drawn b low MC,.
Let us take the firm A first. A will be maximizing
its profits by selling output OM_andsettingpriceMP,
becauseat the output OM marginal cost is equal to
its marginal revenue. Asregardsthe firm B, profits
_ bemaximum_whenitsellsONoutput and fixes
NK price, because at this output its marginal costis
equal to its marginal revenue. It can be seen that the
profit-maximizing price MPofthefirm A is lower than
the profit-maximizing price NKof the firm B. The two
-
firms will have to charge the same price sin
° — tok ee

ce the
products of the twofirmshave been assumed to be
homogeneous. ThismeansthefirmA,whoseprice
MP is lower,will dictate the price to the firm B whose
profit-maximizing price NKishigher. Inin Ca
casseetth e firm
Brefuses to fall in line, it can be ouste
nne
s efi A
: : r
rectaetait,
€dbythefirm
whichwillbechargingthe lowerprice, This shows
”

that in this situation, the firm A is the prj

Annleader and
the firm hasfollowit, , —
It can also be seen that althou
gh the firm B is
compelled to follow A and has to ch
arge the price Mp
(which is lower than its own profit
“maximizing price

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 NK), it will produce and sell output OM like thef
_. A, becauseat the price MP, it can also sell OM OUty
like firm A since the demand curve DDfacing each
firm is the same. Thus, both firms A and B will charg.
the same price MP andsell the same output OM.By
whereas the firm A, the price leader,bejp
eet CLately rears et epnmenscannente ert POI

maximizeits profitsbysellingoutput
OM andcharging
Dero por sasOeeNerF

MPprice,thefirmBwill not beablesobecanse ROLY ERTEA

thepriceMPislowerthanitsprofit-maximizingprice
NK. Hence, the
we
profits earned byfirm B will be smaller
. .
PRT uae
e™, | -
e

thantheprofitsearnedbythefirmA,because th
B hashigher cost.of production. SUT Gee,

_sifficulties of Price Leadership

In the real world, the price leadership does 10!
op er at e sm oo th ly . In st ea d, it ha s to fa ce cer tal t
difficulties :
(a) Onedifficulty is that the price leader 's re
able to assess correctly the reactions of his follow
s

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 Therival firms may not follow its lead.
(b) The rival firms may secretly charge lowe
prices when they find that the price leader hasfixe
unduly higher price. In this way, they mayseekto
increase their share of the market withoutchallenging
the price leader openly. The price-cutting devices
generally are : offe es, favourable credit terms,
‘moneyback’guarantees, after-delivery free Services,
easy instalment sales with low rates of interest and
liberal entertainment given to the buyers.In this way
the price leadership is rendered infructuous.
(c) Theprice leader has to face another difficull)
whenit findsthatthe rival firms are indulgingin ‘no
price competition’ to increase their sales even thous!
they charge the price set by the price
leader. ae
‘non-price competition’ devices include
advertise
andothermethods of sales promotion ii
‘mprovement of the productbesides the secre! pe
product Concessions menti
oned above.

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 (d) Whentheprice leaderfixes a highprice, there
in he re nt te nd ency on th e pa rt of th e riv al
is an
pr od uc er s to ma kese cr et pr ic e- cu ts and th us ad ve rs e!
affect the sales of the price leader. The ii gh pricesel
ic e le ad er ma y. al so _a tt ra ct ne w e o i r a e
by the pr
theindustry-andthesenewentrants may notacc’
leadership.

(ec) Finally,the differencesin cost of peo

also pose a problem. Ifthecost_of production.
4
priceleaderishigher onaccountofwhichhe ei
highpriceandtherival producers have lowet
production,they will have nodifficulty in undero™
theprice. On the otherhand. if theprice Jeadet mi
lowercost, he will seta low price which may
*

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his rivals. This will antogonize them and induce them
to break his leadership.

COLLUSIVE OLIGOPOLY
There can be a collusion amongthe oligopolists
operating in an industry. Underthis situation, the
oligopolists arrive at a tacit or a formal agreement on
a uniform policy as regards price to be charged. When
the agreement is formal, the oligopolists form what|
is known as a cartel,

The collusive oligopoly may take various forms.

An extreme form of collusion is whenthe firms entering
into an agreement surrender completely theirrights of
price-output determination to a céntral agency. In this

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individual profits subject to the fixed agreed price. Each
firm will be able to earn profits on the basis of the
output produced andsold byit and the costs incurred.

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OligopolyandDuopoly =—=_—(333.
way, they secure collectively maximum profits for
themselves. The total profits are distributed among the
POE RICam

member firms inagreed proportions which may not

be necessarily in proportion‘totthe output quota
assigned to each firm. The total cost is sought to be
minimizedby asking the firmsof the cartel to produce
such separate outputs as to make their output costs
equal.

In the real world, formation of perfect cartels is

not very common even when their formation is not
legally prohibited. In actual collusion, the agreement
is only on the price which is generally the joint-profit
maximizing price and the memberfirmsare free to
produce and sell the output which will maximize their

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 MC

MCa MCb MCc

Price

AR

MR

0 O9 OQ QQ; Q
OUTPUT
Fig. 30.7. Equilibrium of cartel-collusive oligopoly.

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JColtusive Oligopoly
‘Cartel’s are a kind of ‘collusive’ oligopoly
OPEC’ Organisation of Petroleum Export countriesis
one of the example ofcollusiveoligopoly. In this type
of oligopoly, a group is formed under an agreement,
where they decide regardingprice of the product output
and area of distribution and marketing. Collusive
oligopolyiis a kind of market in which the whole market
is controlled and divided by the group, and they
changed the output as well asprice.wheneverthey
decide.
In.the_present-world_ofglobalisationaand
liberalise _
liberalisation many companies. are.either merging. wilith
l

We TI)Ag

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 ather big concerns orformsa‘pool’oritiscompletely
‘taken-over’ by.the.big firms. Cartels are taking new
shapes. Some companies they cometogether and form
a group and decidethe pricing and outputpolicy which.
isexplainedbelow.
‘AR’ is the total demand for the product in the
market (including both national and international
market). ‘MR’ is the marginal revenue and ‘MC’is
the marginal cost. Equilibrium is achieved at point ‘E’
which determines the output ‘OQ’. If we raisetheline
‘QE’ it will cut at point ‘K’ on average revenue AR
curve.
mi Draw *PK’horizontal curve. Hence ‘OP’is
en the
~price_ the-total-quantityproduced in an economy
or group is ‘OQ’.
From point ‘E” when we draw a horizontal curve
to "y’ axis it cuts MC,, MC, & MC,at point ‘L,’ ‘L,
ANDL,,. MC,, MC, and MC, are. marginal cost of
ae a

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firm’s ‘a’, ‘b’ and ‘c’. Draw perpendicular’s L,Q, ,
LQ, & a which is nothing but the three hreefirms‘a’,
“1and“c’are_producing_0Q).‘OQ,’
and “OQ,
Be clea pesaeees

output.
senses Se

t~ThefotaloutputOQ
Seerse

OQ, firm ‘a’ output

_2Q,firm ‘b’* output
_-OQ, firm ‘c’ * output
raeOQ), + OQ,,+ OQ;,=O0Q |
Leo
Inthis way the oligopolists damn a group called
collusive — oligopoly and determines the price ‘OP’
and they share their output in the total market demand.

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