OLIGOPOLY

Presented by: Group 5

 Objectives
1. Explain the definition of oligopoly and how it is different from
monopoly.

2. Explain the distinguishing characteristics and classification of

oligopoly.

3. Explain the price-output models for Oligopoly market, depending

upon the behavior pattern of the members of the group.

4. Explain the kinked demand curve model of price rigidity.

5. Explain the distinguishing kinked demand cure under oligopoly.

 Oligopoly
The word oligopoly is
derived from two
Greek words,
“Oligoi and Polien.”
 Oligopoly
“Oligopoly is also often
referred to as “competition
among the few."
Characteristics of Oligopoly
• Few numbers of sellers or few sellers
• Homogeneous or
• Differentiated Products
• Non price competition is used
• Firms are price makers
• Entry is possible but difficult because of entry
barriers (Cost of entering the market)
• Interdependence
Classification of Oligopoly

Perfect and Open and

Imperfect Closed
Oligopolies Oligopolies

Collusive and
Partial and
Non – Collusive
Full Oligopoly
Oligopoly
Classification of Oligopoly
1. Perfect and Imperfect Oligopolies
If the product of the rival firm is
homogeneous then it is a perfect
oligopoly, if the product are
differentiated it is imperfect oligopoly.
Classification of Oligopoly
2. Open and Closed Oligopolies
If entry is open to new firms, it is
termed as Open Oligopoly, and if entry
is strictly restricted it is termed as
Closed Oligopoly.
Classification of Oligopoly
3. Collusive and Non - Collusive Oligopoly
If the firms under oligopoly market combine instead of
competing it is known as Collusive Oligopoly. The
collusive may take place in the form of a common
agreement or an understanding between the firms. And
the situation where the firms compete and follow their
own price and quantity and output policy independent
of their rival firms is known as Non – Collusive Oligopoly.
Classification of Oligopoly
4. Partial and Full Oligopoly
Partial Oligopoly is formed when the dominant
firm which is the price leader, and all other
firms follow the price of the price leader. If no
firm acts as a price leader, then is called Full
Oligopoly.
 Collusive Oligopoly
Collusive Oligopoly refers to a form of oligopoly
in which the competing firms collude so as to
minimize competition and maximize joint profit
by reducing the uncertainties arising due to
rivalry and selling the goods and service at a
monopoly price. In this, the oligopolies enter into
a contract to establish the levels of price and
output in the market.
 Collusive Oligopoly
It can be found in the industries where the
products sold by the firms are homogeneous.
In this type of oligopoly firms know that if they
increase or decrease their prices, there will be a
shift in the demand curve, as the products
offered by all the firms are homogeneous.
And so, the customers can make purchases
indifferently from any firm and may lead to a
huge loss of profit or to a price war.
Two Types of Collusion

Cartel

Price
Leadership
1. Cartel
Association of similar companies or businesses
that have grouped together to prevent
competition and to control prices.

Producer firms enter into a formal agreement

that states the price and output of each firm that
is a member of the cartel. So, in cartel firms
jointly fix the price and output policy by way of
agreements.
 Profit Sharing Cartel or
Joint Profit Maximization
• An extreme form of collusion is found when the member
firms agree to surrender completely their rights of price
and output determination to a ‘Central Administrative
Agency’ to achieve maximum joint profits for the
member firms.

• Formation of such a formal collusion is generally

designated as perfect cartel or joint profit maximization
cartel.
 Market Sharing Cartel
A market sharing cartel is an agreement between competitors to
divide the market or markets among themselves by agreeing not
to compete for each other’s customers, or not to enter or expand
into a competitor’s market.

Market sharing cartels can involve competitors allocating:

• The sale or supply of specific products and services

• Classes of customers.
• Geographical areas.
 Advantages of Cartel
• It avoids price wars among rivals.

• The firms forming a cartel gain at the expense of

customers who are charged a high price for the product.

• The cartel operates like a monopoly organization which

maximizes the joint profit of firms.

• Generally, joint profits are higher than the total profits

 Problems in Cartel
Collusion among corporations is difficult because of:

• Demand and cost differences among sellers

• The complexity of output coordination among producers

• The potential for cheating

 2. Price Leadership
There is an implicit understanding between the oligopolies to
coordinate prices, wherein the dominant firm initiates the price
changes, and all the other firms follow or match the change in
price
.
It can be an open agreement or a tacit (Secret) one. In most
nations, an open agreement concerning the formation of a
monopoly is considered illegal, and that is why the firms often
go for tacit agreement.
 Non – Collusive Oligopoly
Non-collusive Oligopoly is the oldest theory of
competition. It refers to the oligopoly in

which firms are in competition with each other. In a

non-collusive or non-cooperative oligopoly, the
firms survive in a strategic environment, as they
begin with a particular strategy without colluding
with competitors.
 Non – Collusive Oligopoly
• Firms are independent of each other.
• There are a large number of firms.
• Barriers to entry are very less.
• It has strict government regulations.
• Each firm develops an expectation as to what the
rivals’ firms are about to do.
 1 Cournot Model
Models in 2 Bertrand Model
Non-Collusive 3 Edgeworth Model
Oligopoly 4 Sweezy Model
5 Stackelberg Model
 Cournot Model

1 2
This model describes a They compete on
structure in the the amount of
industry wherein output produced,
competitors independently and
offer homogenous concurrently.
products.
 Bertrand Model
It is an economic model, wherein few firms produce
homogeneous goods and sell them to many customers.
Identical products are produced at a constant marginal
cost.

Each firm in the industry considers the price of competitors as

fixed, at the time of determining the price to be charged. So,
the prices are set up independently.
 Edgeworth Model
In this model, the firms sell homogeneous
products, and they have the same cost
function with zero marginal cost.

It is assumed that no duopolies can

produce an output which is as large as
the competitive market.
 Sweezy Model
Also known as the kinked demand model.
As per this model, there are only a few firms in the
market that sell differentiated products to
consumers.
There are barriers to the entry of new firms. It is
believed that the firms will follow price reduction but
won’t follow price hike.
 Stackelberg Model
In this model, one firm is a market leader while
others are followers. The firms offer homogeneous
products, and they compete based on output.
Further, the output is chosen by the firms
sequentially. The leading firm establishes quantity
prior to any other firm. It is -suitable when a large
firm dominates the entire industry.
 Price and Output Decision
in Oligopoly Market
1 2 3

Avoidance of Price Price Wars

Interdependence Leadership
 Price and Output Decision
in Oligopoly Market
4 5 6

Game Theory Non-Price Select Price

Competition Concessions
 Avoidance of
Interdependence
Some economic perspectives suggest that oligopoly
firms can simplify their pricing decisions by
disregarding the interdependence factor.

According to this viewpoint, this approach makes the

demand curve facing an oligopolist more predictable,
thus allowing for more straightforward pricing
determinations.
 Price
Leadership
Another strategy proposes that within an oligopoly, one
firm may emerge as a price leader, with other firms
choosing to follow its pricing decisions.

This leader could be a dominant player or a cost-

effective producer that wields substantial influence
over the market, contributing to price stability.
Price Wars
Certain economists contend that oligopolistic players
can accurately predict their rivals’reactions, leading to
price wars.

Although this approach provides a deterministic

solution to the pricing dilemma, it may also introduce
instability within the market.
Game
Theory
Game theory stands as a prominent framework for
comprehending the dynamics of oligopolistic behavior.
In this approach, firms don’t rely on guesswork
regarding their competitors’ responses; instead, they
calculate optimal strategies based on their rivals’
potential moves. This emphasizes strategic thinking and
equilibrium solutions.
 Non - Price
Competition
Acknowledging the risks associated with price-cut
retaliation, oligopolistic entities frequently resort to
non-price competition.
This encompasses strategies such as advertising, sales
promotions, product enhancements, and brand
building, all aimed at gaining a competitive edge
without direct price adjustments.
Select Price
Concessions
To sidestep open price-cut confrontations, some
oligopolists opt for clandestine price concessions
offered exclusively to select buyers.
This undercover tactic enables them to maintain their
market share without triggering full-scale price wars.
.
Kinked Demand
Curve Model of
Price Rigidity
 Kinked Demand Curve
Model of Price Rigidity
In certain industries where a few big companies
rule the roost, something puzzling happens: prices
don’t change much, even when the economy
shifts. This report looks at why this price stiffness
occurs in these kinds of markets, with a focus on
an idea called the “Kinked Demand Curve Theory”
by American economist Paul Sweezy.
The Kinked Demand Curve Theory
The kinked demand curve
(Sweezy, 1939; Hall and Hitch,
1939) has been one of the
staples of oligopoly theory. It
was originally formulated as a
theory of price rigidity. A firm
conjectures that its rivals will
match its price if it reduces the
price, but will not match its price
if it initiates a price increase.
 Kinked Demand Curve
Under Oligopoly
In these oligopolistic markets, it’s common to see a
phenomenon known as price rigidity, where prices stay
stubbornly fixed despite changes in the economy.
• Price Reduction

• Price Increase

• Price Rigidity
 Price Reduction
•When one oligopolistic firm decides to cut prices to
attract more customers, its competitors get nervous.

• In response, these competitors often lower their prices

too.

• Surprisingly, the firm that initiated the price cut doesn’t

see a substantial increase in sales; it’s as if the demand
for their product stays the same (we call this part of the
 Price Increase
• Conversely, if an oligopolist raises prices, customers
quickly switch to competitors, resulting in a significant
drop in sales.

• Competing firms benefit from this, gaining more

customers and sales.

• This creates a different situation; the demand curve

above the existing price becomes elastic because sales
 Price Rigidity
• Observing this dynamic, oligopolists find little motivation
to change prices.

• Lowering prices doesn’t lead to a significant increase in

market share.

• Raising prices results in notable sales losses.

Criticisms of Kinked Demand Theory
• The oligopoly model provides a theoretical explanation as to
why stable prices exist in oligopolistic industries. But it takes
prevailing prices as given and provides no justification as to
why that prices level rather than some other is the prevailing
price i.e. the kinked demand model can be viewed as
incomplete.

• Stigler had tested the kinked demand curve empirically on

several oligopolies. He found that oligopolistic rivals are just as
likely to follow price increase as price decreases indicating little
support for the kinked demand curve.
• The kinked demand Oligopoly theory does not apply
to oligopoly cases of price leadership and price cartels.

• In the case of pure oligopoly, the kinked demand

curve does not provide adequate explanation for price
rigidity.

•The explanation of price stability by Sweezy’s kinked

demand curve theory applies to depression periods. In
periods of boom and inflation, when the demand for
 Difference
of Oligopoly
and
Monopoly
Difference of Oligopoly and Monopoly

Some major differences of these

two market structures are:

• Number of Firms • Price Determination

• Market Power • Product Differentiation

• Barriers to Entry
Similarities
of Oligopoly
and
Monopoly
CONCLUSION
 Conclusion
Oligopoly market structure is dominated by few large firms or small number
of sellers. Few large firms compete with each other and there is an element of
interdependence in terms of decision making of these firms.

A non-collusive oligopoly, the firms operating in the industry are rivals, due to
their interdependence. In contrast, in a collusive oligopoly, the competing
firms come together to remove the uncertainly causing out of inherent rivalry
among the firms. Oligopolists may use predatory pricing to force rivals out of
the market.
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