Group

OLIGOPOLY

Introduction

The Term Oligopoly has been derived from two Greek words. Oligi which means few and Polien means sellers. Feller defines Oligopoly as Competition among the few.

Meaning of Oligopoly
Thus Oligopoly is an shortened version of

monopolistic competition. It is a competition among few big sellers.

Oligopoly refers to a market situation where

there are a few sellers (2 to 10) in a market, selling homogenous or differentiated products.

Types of oligopoly

Pure Oligopoly (homogenous products)

Differentiated Oligopoly (different but substitute products)

Characteristics of Oligopoly

Few Sellers Homogeneous or Differentiated Product Interdependence

In decision making and setting strategies

High Cross Elasticity

there is always the fear of retaliation(revenge) by rivals.

Importance of Advertising and Selling costs

Firms in Oligopoly market avoid price cutting and try to compete on non-price basis.

Competition
a constant struggle against rivals.

 Different size
Group Behavior
They move on the basis of some assumptions of other behavior

Uncertainty
interdependence creates an atmosphere of uncertainty about price and output

 Price Rigidity
The price remains rigid because of constant fear of retaliation from rivals.

Kinked Demand Curve

inability to predict the behavior of other firms make the demand curve of an Oligopolistic indefinite and indeterminate.

Various Forms of Oligopoly

Perfect and Imperfect Oligopolies
Product of the rival firm are homogenous then it is Perfect Oligopoly, if the product are differentiated it is Imperfect Oligopoly.

Open and Closed Oligopolies

Open and closed entry

 Collusive Oligopoly
Combination for firms, mergers

Partial and Full Oligopoly

If no firm acts as a price leader then it is called Full Oligopoly.

PRICE AND OUTPUT DECISION IN OLIGOPOLY MARKET

Avoidance of Interdependence
When interdependence disappears from decision making the demand curve facing the oligopolist becomes determinate.

Price Leadership
Oligopoly would accept one firm as a leader and would follow him in setting prices.

 Price Wars
economists assume that an oligopolist is able to predict the counter moves of his rivals, and they provide a determinant solution to the price and output problem.

Game Theory
Oligopolist calculates best possible strategies and in view of that adopts its policies and counter moves against rivals.

Non-price competition

Oligopolists face the danger of retaliation in price cut competition, they resort to non-price competition

 Secret Price Concessions

open price cut is retaliated by rivals, some Oligopolists offer secret price concessions for selected buyers.

The fixing of price under oligopoly market situation is very difficult.

Kinked Demand Curve Model of Price Rigidity

In many oligopolistic industries, prices remain sticky or inflexible for a long time even though the economic conditions change.
most popular explanation for this rigidity is the Kinked Demand Curve Hypothesis given by an American economist Paul Sweezy.

According to the kinked demand curve hypothesis, the demand curve facing the Oligopolist has a Kink at the level of the prevailing price. The kink is formed at the prevailing price level because the segment of the demand curve above the prevailing price level is highly elastic and the segment of the demand curve below the price level is inelastic.

Kinked Demand Curve under Oligopoly

The figure shows a kinked demand curve dD with a kink at point k. the prevailing price is OP and the firm produces and sells OQ output. The upper segment dk of the demand curve dD is relatively elastic and the lower segment kD is relatively inelastic.

 Price Reduction
Besides the competitors quickly follow the price reduction by an oligopolist, he will gain only very little sales

Price Increase
The oligopolist who raises its price will lose a great deal and therefore, refrain from increasing price.

Price Rigidity
The Oligopolist will not gain any larger share of the market by reducing his price below the prevailing level.

Hope it was not boring