OLIGOPOLY

RECALL THE BASICS

Oligopoly means a few sellers. There are a few sellers and a large number of
buyers. Oligopoly is very much close to the real market. The firms under
oligopoly can either produced identical products or close substitute products.

Oligopoly is also known as game theory, in oligopoly we have a few sellers,

that’s why the price policy of a firm can affect the price policies of others.
• According to Prof. Baumol,” An oligopoly is a market dominated by a few
sellers at least several of which are large enough relative to the total market
to be able to influence the market prices.”

• According to Stigler,” Oligopoly is that situation in which a firm bases its

market policy in part on the expected behaviour of a few close rivals.”
There are several factors of oligopoly; some of the main features of oligopoly
are as under,
• 1. A few Sellers,
• There are a few sellers in oligopoly, means 5 to 10. In oligopoly there is a
direct competition among the firms.
• 2. Homogenous or differentiated products
• The products available in the oligopoly market can be homogenous or
identical and they also can be differentiated and substitutes.
. Advertisement

Advertisement plays a vital role in oligopoly. According to Prof. Baumol,” It is

under oligopoly that advertising comes fully into its own. Under oligopoly
advertising can become a life and death matter, where a firm which fails to
keep up with the advertising budget of its competitors may find its customers
drifting off to rival products.”
Interdependence

Because of a few firms, we found interdependence among the firms. If a firm

increases its price, no one going to follow and if a firm decrease the price
every one will follow. That’s the way the price decision of a firm affects the
price of other firms also. Because of this reason we found interdependence
among the firms under oligopoly.
 MARKET POWER

• Oligopoly is a market in which a few firms produce all or most of the market
supply of a particular good or service.

• Examples:
• Sports Shoes
• Cereals Producer
• Auto Manufacturers
• Profit Maximization Under Oligopoly
• (Price and Output Decisions under Oligopoly)

• Kinked Demand Curve

• and
• Sticky Prices
Like all other markets, under Oligopoly as well, the Profit Maximizing Output is
the level of output at which

MR=MC
 BATTLE FOR MARKET SHARES

Given the above graph:

Will the profit be equally shared among the three markets?
If so, which producer will have higher share of the profit?
What would those with the lower profit share do?
How?
 INCREASED SALES AT REDUCED PRICES

It is possible that lowering price may expand total market sales and increase the
sales of an individual firm without affecting the sales of its competitors.
There is no way that a firm can do so without causing alarms to go off in the industry.
There are few firms in the market, and they closely follow each other’s action.

In an oligopoly, increased sales on the part of one firm will be noticed

immediately by the other firms.
…because increase in the market share of one oligopolist necessarily reduces the
shares of the remaining oligopolists
• Oligopolists respond to aggressive marketing by competitors by either of
the following methods.

1. Non-Price Competition
• Step up marketing efforts

2. Price Competition
• Cut prices on their product(s).
One way oligopolists market their products is through product differentiation.
Product differentiation – Features that make one product appear different
from competing products in the same market.
Price War
However, an attempt by one oligopolist to increase its market share by cutting
prices may lead to a general reduction in the market price….

!This is why oligopolists always want to avoid price competition and thus
pursue nonprice competition.
 THE KINKED DEMAND CURVE CONFRONTING AN
OLIGOPOLIST

• The shape of the demand curve facing an oligopolist thus depends on how its
rivals responded to a change in the price of its own output.

• The demand curve will be kinked if rival oligopolists match price reductions
but not price increases.
 STICKY PRICE

Prices in oligopoly industries tend to be stable.

Like all producers, oligopolists want to maximize profits by producing where MR
= MC.
The kinked demand curve is really a composite of two separate demand curves.

Creates a gap in an oligopolist’s marginal revenue (MR) curve.

Marginal revenue – The change in total revenue that results from a one-unit
increase in the quantity sold.
As a result, modest shifts of the cost curve will have no impact on the
production decision of an oligopolists.
EQUILIBRIUM UNDER OLIGOPOLY