Presented by:

Shreya Sinha Prerana Bisht

Anjali Gupta
 Oligopoly market form is probably of greatest importance in
today’s economy. However, it is most complex markets on
account of price indeterminateness & absence of well defined
specified goals.

 Interdependence of firms, uncertainty about rivals policy and

skepticism about the profit maximizing goal make it impossible to
arrive at a determinate price-output solution under oligopoly.

 Firms can not apply marginalist principle MC = MR for profit

maximization.

 Thus,uncertainity about reaction patterns poses a serious difficulty

in providing a single determinate solution
PRICING UNDER PERFECT COLLUSION :-

 Means that the firms co-operate with

each other in taking joint actions to keep
their bargaining position stronger against
the consumer.
 An explicit agreement among independent
firms on subjects like prices, output, market
sharing, etc.
 Desire of the firms to have joint profits.
 Short-term phenomenon.
 Two types:-
1. Centralized cartel
2. Market-sharing cartel
Model of centralized cartel :
 An arrangement where the firms in an industry reach an
agreement which maximises joint profits.

 Market demand for the product is the cartel’s demand.

 The output of the cartel is shared between firms on the

basis of efficiency of the firms.
 AR is the demand curve and
MR is the corresponding
marginal revenue.
 Profitable output is where
MC

MR= sum(MC)
 Optimum level of output is P
OX. Revenue,cost(rs.) AR=D
E

MR

O
Units of output
 Firms in the industry produce homogeneous
products and agree upon the share each firm
have.

 Each firm sells at the same price but sells

within a given region.
 Assume that two firms having identical costs
agree to share the market half and half.
 Firms sells equal amount of output at equal
price.
 Following graph shows:-
demand curve for the industry = DD
demand curve for each firm = dd
marginal revenue curve = MR
profit maximizing output = Ox
total output of the industry = 2 * Ox
 price charged by the firms = OP
per unit profit earned by each firm = PC
MC

D
AC
d
Revenue,cost(rs.)
P
D

E d

MR
O x

Units of output
Prisoners

Dilemma
Let us suppose that there are two persons, A and B,
who are partners in an illegal activity of match
fixing. The CBI arrests A and B, on suspicion of
their involvement in fixing cricket matches. They
are arrested and lodged in separate jails with no
possibility of communication between them.
 They are being interrogated separately by the CBI officials
with following conditions disclosed to them in isolation.

(1) If you confess your involvement in match fixing, you will

get a 5-year imprisonment.

(2) If you deny your involvement & your partners denied it too,
you will be set free for lack of evidence.

(3) If one of you confesses and turns approver, and the other
does not, then one who confesses gets 2-year imprisonment,
and one who does not confess gets 10 year imprisonment.
 Given the conditions aforesaid, each suspect has two options open to him
:
(a) to confess
(b) not to confess

 While taking decision, both have common objective i.e. to minimize the
period of imprisonment.

 Given the above objective, both of them deny their involvement in match
fixing.

 But, there is no certainty that if one denies his involvement, the other
will also deny – the other one may confess and turn approver. With this
uncertainty, the dilemma in making choice still remains.
 The problem of their decision making can be depicted through
“Pay – off matrix” :

B’s option

Confess Deny
A’s option
A B A B
5 5 2 10
Confess
Deny 10 2 0 0
 Given the conditions, it is most likely that both the suspects may opt for
confession, as both of them are unsure of each other conduct.

 If both confess, each of them will get 5 year term jail. This is their 2nd
best option.

 For his decision for confession A might formulate his strategy in

manner:
If A confesses then imprisonment of 5 years, but if denied and B
confesses and turn approver then there is chance of 10 years
imprisonment. This would be the worst scenario..

 It is most likely that B reasons out the case in same manner.

 If they both confess, they would avoid 10 years imprisonment, the max.
possible jail sentence under the law. This is the best they could achieve
in given conditions.
 The prisoners dilemma illustrates the nature of problems
oligopoly firms are confronted with in formulation of their
business strategy.

 Strategy like ad-expenditure, price cutting requires a

reasonable justification – the firm will have to anticipate
actions, reactions and counter actions by rival firms and
chalk out its own strategy.

 In case of such problems, the case of prisoners dilemma

becomes an illustrative example
THANK
YOU !!!