OLIGOPOLY

 
In the words of Jackson:
 "Oligopoly is an industry structure characterized
by a few firms producing all or most of the
output of some good that may or may not be
differentiated".
• Steel industry
• Aluminum
• Gas
 Characteristics of oligopoly
• Small number of firms: Oligopoly is a market structure characterized by a few firms.
These handful of firms dominate the industry to set prices.
 
• Interdependence: All firms in an industry are mostly interdependent. Any action on
the part of one firm with respect to output, quality product differentiation can cause
a reaction on the part of other firms.
 
• Realization of profit: Oligopolists firms are often thought to realize economic
profits. Whenever there are profits, there is incentive for entry of new firms. The
existing firms then try to obstruct entry of new firms into the industry.
 
• Strategic game: In an oligopolistic market structure, the entrepreneurs of the firms
are like generals in a war. They attempt to predict the reactions of rival firms. It is a
strategy game which they play.
 
 Three Important Models of Oligopoly:
 

 1. Price and output determination under non-

collusive oligopoly.
2. Price and output determination under
collusive oligopoly.
 
3. Price leadership model.
 Price and Output Determination Under Non-Collusive Oligopoly:

  It will be explain with the help of kinked Demand Curve Model.

 
(i) The Kinked Demand Curve Model:
 
The Kinked demand curve model was developed by Paul Sweezy
(1939). According to him, the firms under oligopoly try to avoid any
activity which could lead to price wars among them. The firms
mostly make efforts to operate in non price competition for
increasing their respective shares of the market and their profit. An
analytical device which is used to explain the oligopolistic price
rigidity is the Kinked Demand Curve.
 
 Explanation
This model operates on fulfilling certain conditions which, in brief,
are as under:
 (a) All the firms in the industry are quite developed with or without
product differentiation.
 {b} All the firms are selling the goods on fairly satisfactory price in
the market.
 (c) If any one firm lowers the price of its product to capture a larger
share of the market, the other firms follow and reduce the price of
their goods in order to retain their share of the market.
 (d) If one firm raises the price of its goods, the other firms will not
follow the price increase. Some of the customers of the price
raising firm will shift to the relatively low priced firms.