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Chapter 12
Chapter 12
Oligopoly
Lecture Plan
• Introduction
• Features of Oligopoly
• Duopoly
• Cournot’s Model
• Stackelberg’s Model
• Kinked Demand Curve: Price Rigidity
• Collusive Oligopoly
• Price Leadership
• Summary
Objectives
• To examine the nature of an oligopoly market.
• To understand the indeterminate demand curve
for a firm under oligopoly
• To look into the various models of price and
output decisions under oligopoly.
• To comprehend the nuances of collusive
oligopoly, with detailed analysis of its various
forms, including cartels.
• To identify with the practice of price leadership
by an oligopolist.
Introduction
• Derived from Greek word: “oligo” (few) “polo” (to sell)
• A few dominant sellers sell differentiated or homogenous products
under continuous consciousness of rivals’ actions.
• Oligopoly looks similar to other market forms; as there can be many
sellers (like in monopolistic competition), but a few very large
sellers dominate the market.
• Products sold may be homogenous (like in perfect competition), or
differentiated (like in monopolistic competition).
• Entry is not restricted but difficult due to requirement of
investments.
• One aspect which differentiates oligopoly from all other market
forms, is the interdependence of various firms: no player can take a
decision without considering the action (or reaction) of rivals.
Features of Oligopoly
• Few Sellers: small number of large firms
compete (Automobile Industry, Oil companies)
• Product: Some industries may consist of firms
selling identical products, while in some other
industries firms may be selling differentiated
products.
• (Differentiated – Cars, motorbikes, Telivision,
Washing machine)
• (Homogeneous – Petrol, Cement, Steel,
Aluminum )
Features of Oligopoly
• Entry Barriers: No legal barriers; only economic
in nature
– Huge investment requirements
– Strong consumer loyalty for existing brands (Xerox
photocopying, Jeep (SUV), Godrej steel almirah.
– Economies of scale (HP Printers)
• Interdependent Decision making
Features of Oligopoly
A B QA QB .
• Thus A and B together supply to
three fourths of the total market,
while one fourth remains
unattended.
Stackelberg’s Model