Oligopoly Market

Chapter 3
Oligopoly Market

 It is another form of market structure. There are a large number of sellers in monopolistic
competition, where as the number of sellers in oligopoly is limited.
 There is no precise upper limit to the number of firms in an oligopoly, but the number must
be low enough that the actions of one firm significantly influence the others.
 Therefore there is a large competition among the few producers or sellers in this market.
 When only two sellers or producers control the whole supply of a product, it is called
duopoly.
 Sellers or producers in oligopoly market sell either homogeneous/non-differentiated or
differentiated products in the market.
 We find examples of oligopoly in cold drinks, mineral water, automobile, cigarette,
detergents, synthetic fibers industries.
 The market structure that Netflix operates under is an oligopoly. In an oligopoly, there are
a few companies that control the entire market. In the streaming market, Netflix, Hulu,
and Amazon are the main competitors. With Netflix being the market leader, they have
large influence over this market.
characteristics

 The market is dominated by a small number of firms.

 There is substantial barriers to entry of new firms.
 The products may be homogeneous or differentiated.
 The uncertainty and risks associated with price competition may lead to price rigidity.
 The decision of oligopolists are interdependent. Firms must decide their strategy to
compete with close rivals but they must also try to anticipate their rival’s reactions and
think the next step should be in light of this response.
 Firms may or may not choose to maximize profit.
 In long run, the firms are capable of earning super normal profit. However in practice,
profit may not always be as high as possible.
 Firms are engage in limit pricing and predatory pricing.
 Oligopolists are price makers.
 High concentration ratio.
Non price competition

 Firms may use non price competition in oligopoly because they have agreed not to
compete by means of price or because they are afraid of losing their influence in the
market due to a price war.
 Non price competition include the use of brand names, distinctive packing, free gifts,
special features to the products and competition.
 In perfect oligopoly, competition is based on research and development, free delivery, time
guarantee etc. where in imperfect oligopoly the most important form of non price
competition is usually advertising.
Price and output determination in oligopoly
market
 Since in oligopoly market, firms are interdependent to each other, a firm which makes
change in price of its product or level of output cannot assume that the other rival firms
keep the price and quantity unchanged or constant.
 When an oligopolists firm makes change in price, the other rival firm will retaliate
(counter attack ) and change their prices.
 This reaction of the rival firm will affect the demand of the product of the former firm.
 Hence an oligopolist has no definite demand curve, so it is difficult to determine price and
output level for him.
 However, the economists have developed some of price and output models on the theory of
oligopoly.
OLIGOPOLY

 COLLUSION & COMPETITION

Oligopolists are pulled in two different directions:

COLLUSION
Firms agree to limit competition and may collectively
become a ‘monopolist’

COMPETITION
Firms may seek to compete in order to gain market
share and profit.
 1. Competition: when firms deal with differentiated product, they can ignore
interdependence.
 In that case they make competition with each other for the promotion of individual
interest.
 When the firms deal with differentiated product, demand can be ascertained (discovered)
then, price and output can be determined in a way similar to monopolistic competition i.e.
price and output is determined at a point where MC=MR.
Collusive Oligopoly

 2. Collusion model: when oligopolists deal with homogeneous product or non-

differentiated product, a firm cannot have a definite demand curve.
 They realize their interdependence and pursue (move for) their common interest and will
form collusion.
 The collusion creates conditions almost similar to a monopoly and price determination will
be similar to that of monopolist. This is called collusive oligopoly. For example,
organization of petroleum exporting countries (OPEC).
 Collusive oligopoly has the following forms.
 A. cartel: it has different forms such as market sharing, production quota and price
agreement.
 These firms in order to pursue their common goal, recognize their interdependence and
make attempt for their survival in the market.
Profit-maximising cartel
£

Industry D = AR

O Q
Profit-maximising cartel
£
profit is
maximised at Industry MC
Q1 and P1.

P1

Members must
agree to restrict
total output to Q1.

Industry D = AR
Industry MR

O Q1 Q
 They enter into the agreement for sharing market or allocating production quota or for
selling the product at the price as agreed upon.
 The agreement may be legal or illegal.
Carteling safeguard the interest of the firms and creates the environment similar to monopoly
but it is against the interest of consumers because it kills competition.
Where cartels are illegal, firms might enter into TACIT COLLUSION
TACIT COLLUSION: PRICE LEADERSHIP
Firms keep to the price set by an established leader:
DOMINANT FIRM PRICE LEADERSHIP
BAROMETRIC FIRM PRICE LEADERSHIP
 B. Price leadership: All firms in oligopoly will accept a particular firm as a leader and
will follow it in determining price.
 The leader firm will be either dominant or holding majority market share (dominant firm
price leadership) or low cost firm or a respectable firm having historical reputation
(barometric firm price leadership) that can protect the interest of all the firms under the
industry.
 The price determination by the leader firm will be acceptable to all and adjust their output
accordingly.
 C. Syndication: All sellers selling similar product or service join hands to protect their
common interest and to safeguard the members from the threats of competition outside.
 No firms other than members of syndicate can supply goods or services. It also kills
competition in the market such as transport service.
OLIGOPOLY

OLIGOPOLY AND THE PUBLIC INTEREST

Advantages to Society:
1. Use of supernormal profit for R&D. There are
significant incentives to innovate as it offers competitive
advantages.
2. Non-price competition through product differentiation
results in an extension of consumer choice
OLIGOPOLY
OLIGOPOLY AND THE PUBLIC INTEREST

If Oligopolists act collusively [joint profit maximise]

they will in essence behave as a monopolist.
Disadvantages to society:
1. Objections as monopoly
2. There is likely to be less opportunity for
economies of scale [compared to monopoly].
OLIGOPOLY

OLIGOPOLY AND THE PUBLIC INTEREST

Disadvantages to society:
3. Oligopolists are likely to undertake more advertising
[than monopolists] which increases costs.
OLIGOPOLY
OLIGOPOLY AND THE PUBLIC INTEREST
The above public interest objections can be
lessened, however, if…
1. Oligopolists do not collude
2. there is some price competition
3. Entry barriers are weak
4. Oligopolists trade with other powerful
[oligopsonistic] firms [countervailing power].
5.The markets in which they operate are
contestable