NAME:- ANJALI SINGH

CLASS :- BA ( ECO HONS.) III Sem

SUBJECT:-MICROECONOMICS II
TOPIC:- OLIGOPOLY MARKET

III INTERNAL
SUBMITTED TO:- MISS SURABHI
DUBEY
 MEANING OF OLIGOPOLY
 It is the form of market where there are a few big firms and a large number
of buyers of a commodity. Each firm has a significant share of the market.
Price and output decision of one firm significantly impacts the decisions of
the rivals. There is high degree of interdependence in this market.
 This type of competition is also known as cut-throat competition.
 Example-: There are only few car producers in the Indian Auto market
Toyota, Ford, GM, Audi are some well known brands.
 Each one has a significant share in the market and price and output
decision of one affects another.
CHARACTERISTICS OF OLIGOPOLY
Few Dominant Firms:
Under oligopoly, few large sellers dominate the market for a product. Each seller has
sizeable influence on the market.
Every firm possesses a large degree of monopoly power (when products are
differentiated) and accounts for a large part of market’s total demand. It uses all
resources at its disposal to counter the actions of rival firms to ensure its survival and
growth in the market. Thus, each firm acts as a strategic competitor.

Barriers to Entry
Under Oligopoly, a firm can earn super-normal profits in the long run as there are
barriers to entry like patents, licenses, control over crucial raw materials, etc. These
barriers prevent the entry of new firms into the industry.
Non-Price Competition
Firms try to avoid price competition due to the fear of price wars in Oligopoly and
hence depend on non-price methods like advertising, after sales services, warranties,
etc. This ensures that firms can influence demand and build brand recognition.
Interdependence
Under Oligopoly, since a few firms hold a significant share in the total output of the industry,
each firm is affected by the price and output decisions of rival firms. Therefore, there is a lot
of interdependence among firms in an oligopoly. Hence, a firm takes into account the action
and reaction of its competing firms while determining its price and output levels.
Nature of the Product
Under oligopoly, the products of the firms are either homogeneous or differentiated.
Selling Costs
Since firms try to avoid price competition and there is a huge interdependence among firms,
selling costs are highly important for competing against rival firms for a larger market share
No unique pattern of pricing behavior
Under Oligopoly, firms want to act independently and earn maximum profits on one hand
and cooperate with rivals to remove uncertainty on the other hand.
Depending on their motives, situations in real-life can vary making predicting the pattern of
pricing behavior among firms impossible. The firms can compete or collude with other firms
which can lead to different pricing situations
DEMAND CURVE UNDER OLIGOPOLY

Indeterminateness of the Demand Curve

Unlike other market structures, under Oligopoly, it is not possible to determine
the demand curve of a firm. This is because on one hand, there is a huge
interdependence among rivals. And on the other hand there is uncertainty
regarding the reaction of the rivals. The rivals can react in different ways
when a firm changes its price and that makes the demand curve
indeterminate.
FIRMS BASIS FOR
COMPARISON
COLLUSIVE OLIGOPOLY
NON-COLLUSIVE
OLIGOPOLY

BEHAVIOUR Meaning A Collusive Oligopoly is one

in which the firms cooperate
and not compete, with one
another with respect to price
UNDER Profit
and output.
Collective profit
A Non-Collusive Oligopoly is
one wherein each firm in the
industry pursues a price and
output policy that is
independent of competitors.
Individual profit

OLIGOPOLY Objective To reduce competition and

to create and maintain entry
barriers.
To maintain competition and
to work independently as a
normal business.
Price and Output Mutual or Interdependent Independent
decision
 COLLUSIVE & NON-COLLUSIVE

Formation of monopoly Yes No

Price benefit Consumers receive fewer price Consumers receive price benefits
benefits, due to monopoly. due to competition between sellers.

Brand Loyalty No need to incur expenses to Powerful advertisement creates

create brand loyalty. brand loyalty.
PRICE AND OUTPUT DECISION
 Unlike other market forms, price and output under oligopoly is never fixed.
Interdependence of firms led uncertainty always exists in the market. In
such a situation, it becomes difficult to determine the equilibrium price and
output for an oligopolistic firm. An oligopolist cannot assume that its
competitors will not change their price and/or output if it changes. Price
change by one firm will be followed by other competitors, which will
change the demand conditions facing this firm. Therefore, demand curve
for any firm is not fixed like other markets. Demand curve for a firm keeps
changing as firms change their prices. Therefore, in the absence of a fixed
demand (Average Revenue) curve, it is difficult to determine the
equilibrium price and output. However, economists have developed some
price-output models to explain the behaviour of oligopolistic firms. They
are as follows:
I. Some economists ignore the interdependence among the firms when they
explain the oligopoly market. In such case the demand will be known and
equilibrium price and output can be determined.
II. Another approach is based on collusion. Oligopolists can form a group and
maximize their joint output and profit. Best example of such collusion is Cartel (it
is a situation when oligopolists agree to work together in the international market).
One firm is chosen as a leader. The prices determined by the leader are followed
by others in such a case.
III. Third approach assumes that an oligopolist predicts the reaction of its
competitors. Problems regarding prices and output determination are solved by
such assumptions. Various models based on different assumptions exist in this
category.
Few of them are: Chamberlin Model, Cournot’s Model, and Paul Sweezy Kinked

Demand curve Model etc .

 COURNOT’S MODEL

In 1838, Augustin Cournot introduced a simple model of duopolies that

remains the standard model for oligopolistic competition. This modal is based
on the following assumptions .

1) The two firms produce homogeneous and indistinguishable goods.

2) There are no other firms in the market who produce the same or substitute goods.
3) No other firms can or will enter the market.
4) Collusive behavior is prohibited. Firms cannot act together to form a cartel.
5 ) There exists one market for the produced good
Let’s assume that the two firms face a single market demand curve as follows:

Q = 100 – P
where P is the single market price and Q is the total quantity of output in the
market. For simplicity’s sake, let’s assume that both firms face cost structures as
follows:
MC1 = 10
MC2 = 12
Given this market demand curve and cost structure, we want to find the reaction
curve for Firm 1. In the Cournot model, we assume Q 2 is fixed and proceed. Firm
1's reaction curve will satisfy its profit maximising condition, MR = MC . In order to
find Firm 1's marginal revenue, we first determine its total revenue, which can be
described as follows:
Total Revenue = PQ1 = (100 – Q) Q1 = 100Q1 – (Q1+ Q2) Q1
= [100 – (Q1 + Q2)] Q1
= 100Q1 – Q1 2 – Q2Q1 = 100Q1 – 2 Q1 – Q2 Q1
The marginal revenue is simply the first derivative of the total revenue with
respect to Q 1 (recall that we assume Q 2 is fixed). The marginal revenue for Firm
1 is thus: MR1 = 100 – 2Q1 – Q2
Imposing the profit maximising condition of MR = MC , we conclude that Firm 1's reaction curve
is:
100 – 2 Q1 – Q2 = 10
Q1 = 90 2 – Q2 2 Q1 = 45 – Q2

That is, for every choice of Q2, Q1 is Firm 1's optimal choice of output. We can perform
analogous analysis for Firm 2 (which differs only in that its marginal costs are 12 rather than
10) to determine its reaction curve. We find Firm 2's reaction curve to be:
Q2 = 44 – Q1/2.
The solution to the Cournot model lies at the intersection of the two reaction curves. We solve
now for Q1. Note that we substitute Q2 for Q2 because we are looking for a point which lies on
Firm 2's reaction curve as well.
Q1 = 45 – Q2/2 = 45 – (44 – Q1/2)/2
= 45 – 22 + Q1/4 = 23 + Q1/4
=> Q1 = 92/3
By the same logic, we find:
Q2 = 86/3
Note that Q1 and Q2 differ due to the difference in marginal costs. In a perfectly competitive
market, only firms with the lowest marginal cost would survive. In this case, however, Firm 2
still produces a significant quantity of goods, even though its marginal cost is 20% higher than
Firm 1's.
DIAGRAMMETIC REPRESENTATION
An equilibrium cannot occur at a point not
at the intersection of the two reaction curves.
If such an equilibrium existed, at least one
firm would not be on its reaction curve and
would therefore not be playing its optimal
strategy. It has incentive to move elsewhere,
thus invalidating the equilibrium. The
Cournot equilibrium is a best response made
in reaction to a best response and, by
definition, is therefore a Nash equilibrium.
Unfortunately, the Cournot model does not
describe the dynamics behind reaching
equilibrium from a nonequilibrium state. If the
two firms began out of equilibrium, at least
one would have an incentive to move, thus
violating our assumption that the quantities
chosen are fixed. Rest assured that for the
examples we have seen, the firms would
tend towards equilibrium. However, we would
require more advanced mathematics to
adequately model this movement.
 DUOPOLY
A duopoly is a market situation that entails two competing companies that share
the market. In this market, two brands can collude to set prices or quantities and
make customers pay more money.
 A duopoly is a specific form of oligopoly. The oligopoly market consists of
several players with considerable market power. Barriers to entry are also high
so that the threat of new entrants is low. Few companies control a large market
share, enabling them to influence market supply. Besides, the source of market
power also comes from a differentiation strategy, allowing companies to charge
premium prices.
 Meanwhile, under duopoly, market power is concentrated between two firms.
Both have significant monopoly power and high strategic dependence.
 One manufacturer’s strategic decisions have a significant impact on other
producers. For this reason, the market is likely to introduce collusive behavior.
And when that happens, the two companies act as though they are monopolists
 CHARATERISTICS OF DUOPOLY
• Market consists of two producers. Both producers serve a large number of buyers, so their
bargaining power is high.
• Producers have a high strategic dependence. Strategic actions and decisions by one
company have a significant impact on the competitor.
• Chances of collusive behavior are high. Since both of them are highly interdependent, they
are likely to collude to secure high market profits.
• The level of competition may be fierce. This happens when the two do not collude.
Regulators usually keep a close eye on this market to avoid anti-competitive practices.
Therefore, the strict supervision of regulators means that the two cannot collude.
• Monopoly power is significant. Apart from controlling the market supply, the two companies
may also adopt a differentiation strategy. As long as each adopts a differentiation strategy,
each product will have several loyal customers, presenting significant monopoly power.
• Entry barriers are high. It can stem from structural barriers inherent in natural characteristics
of markets such as economies of scale. Or, both companies have deliberately built entry
barriers such as low-price strategies and brand loyalty.
• Economies of scale are high. Each of the companies enjoyed high sales because the
market was split between only two companies.
 COURNET’S DUOPOLY
 As the name suggests, this model comes from Antoine Cournot, a French
mathematician and philosopher.
 Under the Cournot model, quantity determines market competition and, thus, the
output of competition. Both firms will produce at a rate that maximizes profits and
selects output simultaneously.
 Each company produces according to the output of competitors and market supply.
Both assume that the competitor’s output does not change. The model also assumes
that players do not collude.
 When the market reaches equilibrium, each firm has no incentive to change output
or prices. The change will not make any company better. Therefore, in the long run,
output and prices are stable. The outcome of Cournot competition (output and price)
will be between the perfect competition and monopolistic competition equilibrium.
 PAUL SWEEZY MODEL
Paul Sweezy Model also known as Kinked Demand Curve Analysis is based
on following assumptions:-
 i) There are only a few firms in an oligopolistic market.
 ii) The firms are producing close-substitute products.
 iii) The quality of the products remains constant and the firms do not spend on
advertising.
 iv) A set of prices of the product has already been determined and these prices
prevail in the market at present.
 v) Each firm believes that if it reduces the price of its product, the rival firms
would follow suit, but if it increases the price, the rivals would not follow it. They
would simply keep their prices unchanged. We shall see presently that, because of
this asymmetric pattern of reaction of the rivals, the demand curve of each firm
would have a kink at the prevailing price of its product.
Why the Kink in the Demand Curve?

In the figure we have drawn two negatively

sloped straight line demand curves, viz., dd' and
DD'. Of these two curves, dd' is more flat than
DD'. Now, when one particular firm in the industry
changes the price of its product, all other firms
keeping their prices constant, the firm’s demand
curve will be relatively flatter like dd', i.e., the
magnitude of the change in the demand for its
product as its price changes would be relatively
larger. Fig. 12.2 This is because, as the firm
reduces or increases the price of its product, the
prices of the products of other firms remaining
constant, the product of the firm becomes
relatively cheaper or dearer, respectively, than
those of the other firms. This will make the
demand curve flatter for this firm.
On the other hand, if a firm increases its price, the office firms will not follow the
suit. So there will be an asymmetry in responses of the rivals. If one firm reduces
price, all others follow the suit – otherwise they run the risk of losing their
customers to this firm. If one raises the price, others do not as they expect to win
some customers from this firm. Together, these responses create a kink in
demand curve. Let us suppose that initially the price of the product of the firm is
p1 or Op1 and the demand for the product is q1 or Oq1 If the firm now increases
its price from p1, the rival firms would keep their prices unchanged according to
assumption (v) of this model. In this case, the firm’s demand would decrease
along the segment Rd of the relatively more elastic demand curve dd'. On the
other hand, if it goes on decreasing its price from p1, its rivals also would be
decreasing their prices according to assumption (v). In this case, the quantity
demanded of the firm’s product will increase along the segment RD' of the
relatively steeper demand curve DD'. Therefore, at the price p1, the firm’s
demand curve would be dRD'. Obviously, because of assumption (v), the
segment dR of this demand curve would be more flat or more elastic than the
segment RD' (and the segment RD' would be more steep or less elastic than the
segment dR). As a result, there would be a kink at the prevailing price p1, or, at
the point R on the firm’s demand curve d RD', i.e., the demand curve in this
model would be a kinked demand curve
DEMAND CURVE UNDER OLIGOPOLY ACCORDING TO PAUL SWEEZY
MODEL
 CONCLUSION
 A monopoly, for example, though it is highly profitable thanks to its
consumer surplus and supply curve, makes for a very dull economy where
everything is the same. Human beings are diverse by nature. Nobody
wants one kind of anything. Imagine having to watch only Marvel movies,
or drink only Pepsi, or eat only Subway for the rest of your life. It won't be
very fun.
 In a nutshell we can say that the oligopoly market situation is similar to
monopoly market situation but with more than one number of seller up to
limit extent.