Features and market structure

Oligopoly is a market where a few dominant sellers sell

differentiated or homogeneous products under
continuous consciousness of rival’s actions.
Oligopoly - Competition among the Few

• In an oligopoly there are very few sellers of the good.

• The product may be differentiated among the sellers (e.g.
automobiles) or homogeneous (e.g. gasoline).
• Entry is often limited either by legal restrictions (e.g.
banking in most of the world) or by a very large minimum
efficient scale (e.g. overnight mail service) or by strategic
behavior.
• Sill assuming complete and full information.
 Types of oligopoly:-
•Differentiated oligopoly:-When there is
product differentiation among the sellers,
the market is called differentiated oligopoly
•Pure oligopoly:-In technical terms , the
market is called pure oligopoly or oligopoly
without product differentiation.
FEATURES

•Few Sellers
•Product
•Interdependent Decision
making
•Non – Price Competition
•Indeterminate demand curve:-
in oligopoly each firm faces two
demand curves , one is highly
elastic and other is less elastic.
•Entry Barriers.
• Huge investment
• Strong Customer loyalty
• Economies of Scale
Duopoly
Duopoly is a special case
of oligopoly with only two
players in the market.
 Kinked Demand Curve:- Price rigidity
Assumptions

• If a firm increases its price, others will not

follow
• If a firm decreases its price, others will also do
the same.
 Contd….
• Competitive reaction pattern assumed by kinked
demand curve oligopoly is as follows:-
Each oligopolistic believes that if he lowers the
price below the prevailing level, his competitors
will follow him and will accordingly lower their
prices, whereas if he raises price above the
prevailing level, his competitors will not follow his
increase in price.
So oligopolistic will be extremely reluctant to
change the prevailing price.
The demand curve is more elastic
above the kink and less elastic
below the link.
 Collusive oligopoly
• Important characteristic of oligopoly market.
• Rival Firms enter into an agreement in mutual
interest on various accounts such as price etc.
• Types of collusions:-
– Explicit collusion or cartels:- formal agreement
among firms.
– In a tacit collusion firms do not declare a cartel
but informally agree to charge the same price
and compete on non price aspects.
 Cartels
• A cartel is a formal agreement among firms on
price and output.
• Formation of cartels involves agreement on:
– Price fixation
– Total industry output
– Market share
– Allocation of customers
– Allocation of territories
– Establishment of common sales agencies
– Division of profits
 Types of Cartels
• Centralized Cartel:- is an arrangement by all
the members, where a centralized body
decides on the pricing. Product is essential to
be homogenous.

• Market Sharing Cartel:-is an arrangement by

all the members to divide the market share
among them and fix the price independently.
 Price Leadership
• The agreed upon price under collusion may
have been fixed on the basis of going rate or
the price charged by the largest or the most
sophisticated player.