Islamic Microeconomics

OLIGOPOLY

Islamic Economics Department

Faculty of Economics and Business
Universitas Airlangga
Characteristics of Oligopoly
Oligopoly

Few Seller Differentiated products

Entry barriers Reaction Monopoly power

interdependent Downward sloping

demand curve
 Types of Oligopoly

Non-collusive oligopoly

Oligopoly Collusive oligopoly or cartel or

oligopoly with formal collusion

Barometric firm
Tacit
Price
collusion leadership
Dominant firm or
natural price
leadership
Low-cost price
leadership
Non-collusive oligopoly
Rp
Kinked demand curve

M
L MC1 AC1 Symptoms of price rigidity –price
D remains 0A (as long as MR is vertical
A
B E
between F and G) even if costs
J K AR1
MC2 change.
F AC2
AR2
M
L Profit is not the same
G
JADK ≠ LADM
0 Q
Q’ Q1 Q3 Q2

MR2 MR1
 Collusive Oligopoly
AC3 Market demad curve
Rp Rp AC2
Rp MC3 Rp
MC1 AC1 MC2 MCM
PM

L E
ARM

0 0 0 0
Q1 Q2 Q3 QM
Output output output output MRM

Q1 + Q2 + Q3 = QM

In this type of oligopoly, a number of firms collude to set a single price

that applies to each member firm. It is from this collusion that they earn
their own profit (or loss). That is why this cartel model is also called joint
profit maximization.
 Tacit collusion  price leadership 
BAROMETRIC FIRM

Due to the quality of Because it is considered the

management most able to read the market

A firm becomes a barometer

All other firms adjust their respective prices (not equalize) with
the selling price of the barometer firm.
 Tacit collusion  price leadership 
DOMINANT FIRM
Rp
DM
MCS DM is the market demand curve.
P1
MCS is the supply curve of the entire small firm.
P2
At a price of 0P1, all market output (0Q1) is sold by
small firms, so the large firms have no share.
0 Q
Q1 Q2
Rp At a price of 0P2, all market output (at 0Q2) is sold by
the big firms, so the smaller firms have no share.
DM

P1 MC The big firm sells output as much as 0Q3 and sets the
AC price at 0P3.
P3
P2 AR Large firms earn profits equal to the shaded portion.

Q All small firms sell the remaining Q2Q3 at a price of

0 Q3 Q2 P3.

MR
 Tacit collusion  price leadership 
LOW-COST PRICE LEADERSHIP
Suppose there are only three firms. All three are identical, but the efficiency is not the same.

Rp Rp Rp

P1 MC1 P2 MC2 AC2

P MCL AC1
ACL
ARL AR1 AR2

0 Q 0 Q 0 Q
QL Q1 Q2
MRL MR1 MR2
MONOPOLY
 Monopoly Symptoms

One firm industry (industry containing only one firm)

Price maker (price fixer; full market-power)

No specific case for the long run (had no long term

problems)
 Source of Monopoly

• Patent
• Right given by the government
• Input mastery
• Technology
• Market is too small
• Natural monopoly
Monopoly Demand Curve
Even if monopolists trade alone, it is certain that the monopolist will sell
goods that are not in the absolute interest of the consumer.

 There is always the possibility that consumers will not want to buy
their merchandise if they feel they are not important, or the price is too
high.

Rp

Thus, the monopolist's demand curve is

downward sloping. Likewise, the MR
curve.

AR
0 Q
MR
 NATURAL MONOPOLY

(i) Good management and

(ii) regional peculiarities
Rp
will result in efficiency, so
that the firm gets economies
of scale. As a result, AC
A G constantly drops for a long
E K output range (BD).
I
H
L
Whenever a competitor
(will) come, the monopolist C AC
lowers its selling price to AR
repel competitors. Even so,
he still made a profit. 0 Q
B F J D
Monopoly Balance
Rp

A B
MC

AC
C
D
E AR

0 Q
F

MR
Monopoly Disadvantages

Even if they work alone, the monopoly may suffer losses.

Low Demand
Internal Management
High Cost
Losses come
from Expensive Input

External The government implements monopoly

regulation  monopolists are forced to
lower the selling price.
 Monopoly Regulation

AC pricing or normal-profit
pricing.

Monopoly Pricing
arrangement

MC pricing.
 Monopoly Regulation
AC -pricing
Rp The monopolist sells output 0F at a price of 0A.
Therefore profit = ABCD.
A B The government considers output to be too little
and/or prices too high.
AC The government sets the regulation for AC-pricing.
MC
G  P = 0G and output = 0H.
D
C
New AR curve New MR curve
E
AR But at output level 0H, the firm is not
in equilibrium, because MR ≠ MC, and
0 Q only earns normal profit.
F I H
The government allows firms to sell
output as much as 0I.
MR The new profit is as big as the blue box.
 Monopoly Regulation
MC -pricing
Rp The monopolist sells output 0F at a price of 0A.
Therefore profit = ABCD.
A B The government considers output to be too little
MC
and/or prices too high.
AC The government sets MC-pricing rules.
G
 P = 0G and output = 0H.
D
C New AR curve New MR curve
E
AR The new profit is as big as
the blue box.
0 Q
F H

MR
 Monopoly Regulation
Rp
MC -pricing
There is a special case regarding natural
monopoly
B The government sets the rules MC-pricing.
A MC
New AR curve New MR curve
D C
AC As a result, the firm loses as
G much as the blue box.
AR Of course, the firm was not willing,
E
and chose to close the business.
0 Q
F H Firm will only continue its business if
the government subsidizes at least
equal to the loss.

MR
 - PRICE DISCRIMINATION -

In order to increase profits, the monopolist can perform price

discrimination, namely setting more than one price for one
product it sells.

PD level:
1.PD level 3: monopolist sets two prices.
2.PD level 2: the monopolist sets more than two prices.
3.PD level 1 of perfect price discrimination: the monopolist
charges different prices for different consumers.
 THIRD DEGREE PRICE DISCRIMINATION

Here only the third degree is presented, because the other levels are only
the development of this third degree.
PD requirements:
1.Monopolist is able to separate the market.
2.The elasticity of demand in the two markets is not the same  in the
market where the demand is more elastic, the price is lower.
3.No resale
Remember, one of the formulas for elasticity of demand is
P
e
P  MR
so, the more elastic the demand for a good (that is, the greater e), the
lower the price (or P).
 - THIRD DEGREE PRICE DISCRIMINATION -

Rp Rp Rp

MC

PH
PW

ARH ARW AR

Q 0 Q 0 Q
0 QW Q
QH
MR
MRH MRW

World market is more elastic than home market  PH < PW

Q = QH + QW