Economics

Topic: Oligopoly

Submitted by:-
Name roll no

Raju Panjabi 71413

Aparna 71414
Dayal 71415
Sujit 71416

Submitted To:- Kiran Madam

Sr Particulars Pag Re
no e ma
no rk

1. Introduction 1

2. Acknowledgement 2

3. Meaning & features 4

4. Models Of oligopoly 8

5. Practical problems 17

6. Harmful Effect 18

7. Arguments 19

8. Conclusion 20

9. Bibliography 21
 Acknowledgement

We thank you to Kiran Madam for this project. We know about

oligopoly market structure as well as its meaning & features.

I also thank you to my group because they are also help me to

search information about this project.

I also thank you to my parents, because they are also give me

additional knowledge about this topic.
 Meaning: Oligopoly is a market structure in which there are
few sellers selling homogeneous or differentiated products.
When the firms sells homogeneous products then they are
called as pure oligopoly.
When the firm sell differentiated products then the firm called
as differentiated oligopoly.

Features of Oligopoly are following:

(1) There are few sellers in the market. Oligopoly is defined as the market
where there is competition among the few.

(2) The sellers may sell homogeneous or differentiated products.

(3) There is a high degree of interdependence among the firms in matter
related to price and output. The action of each firm affects the other firms
in the market. For e.g. if Jet Airways reduces the prices then Indian Airlines
attempted the same.

(4) There is constant rivalry amongst the firms. They try to compete with
each other on the basis of price, product, advertising, etc.

(5) All the firms incur huge investment on advt. expenditure. In this market.
When one firm increase the advertisement expenditure other also follow the
same. Hence, non-price competition is very serve here.

(6) There is lack of homogeneity in the market. It implies that the firms are
of different sizes.

(7) There is lack of certainty in this market. The business firms aim at
maximum profit and they want to be independent in decision making.
They act and react continuously according to the decision
of the rivals. Hence, there no certainty in this market.

(8) The degree of cross elasticity is very high in this market

as the products are close substitutes for each other.

(9) Price rigidity is one of the oligopoly market. If one of

the oligopolistic increases the prices, others will not follow
suit. There will affect the demand for the products of the
former. On the other hand, if reduce the price other will also
reduce their price. Hence, it does not lead to increase the
demand. Hence the sellers generally try to maintain the
same price.
(10) Oligopoly market structure prevails when few firms enjoy economies of scale
for a long period of time, when the government gives the protection, when
investments involved is huge which only few firms can afford and when the firms
have exclusive patenting rights. Low pricing by the existing firms will acts as a
barrier for the entry of new firms and this prevents further competition.

Oligopoly market structure in reality is represents by industries like

automobiles, cigarette manufactures, etc.
Each one of them have their own brand name, price & features.
OLIGOPOLY MODELS:
 
There are various types of oligopoly models based on the nature of competition. However no
single model can give a precise explanation of price equilibrium.
This is because the demand curve of a firm is indeterminate. The various models help to
understand a problem of equilibrium in the oligopoly market.
The following three forms of price-output determination are noteworthy.
 
(1) The kinked demand curve model:
This model was given by famous economist Paul Sweezy in 1939. It tries to explain the
problems of price rigidity in this market. It also indicates that oligopoly firms would like to
have a non-price competition rather than a price competition. This is because if one of the
firms increases the price, other firms will not follow suit. Hence the firms will lose its
customers to the rivals. On the other hand if it lowers the price, others will also lower the
price. Hence the firm will not get any additional benefit by reducing the price. Thus
oligopoly firms would like to retain the same price and compete on the basis of other factors
like advertising, quality after sale service, etc.
 Y

MC 2
A
P MC

MC1
Revenue
&
Cost
E

D (AR)

X
o
Output
MR
In above diagram DD is the demand curve. It has a kink of point A.
MR is the marginal revenue curve.

The equilibrium level of output and price is determined at the point where the MC
curve cuts the vertical portion of the MR curve.

In the above diagram the equilibrium output is OQ and the price is OP. There will
not be any change in price & output even if there is a shift in MC either upwards
and downwards.

Like firms in other market structures, the oligopoly firm can earn profits or incur
loss in the short run. It will continued to produce as long as price is more than
average variable cost.
(2) Cartel Formation: Severe competition prevails among the few
firms under oligopoly. It is both price as well as non-price. The firms by
and large prefer non price competition. Sometimes to avoid the ill- effects
of competition they prefer to form a cartel. A cartel is an organization of
few firms, which enter into an agreement regarding price and output. Here
the members jointly decided about the output to be produced and the price
to be charged. Cartels are of 2 types namely:

(a) Market Sharing Cartel and

(b) Centralized cartel

In the former each member has an exclusive right to sell the

commodity in a particular geographical location. In the second case, the
member countries agree on the quota of output to be produced by each
member, the price to be charged and sharing the profits.
When the firms under oligopoly operate in a cooperative manner and minimize
competition, it is also termed as collusive oligopoly. When the few firms agree to
charged the same price and not undercut each other, the rewards are significant.
They will be producing the monopoly output and their profits are will monopoly
profits. Let us suppose there are three firms which joint together to maximized
their profits taking into account their high degree of interdependence. Since all of
them decide to charge the same price, the demand curve of each firm will have the
same elasticity as the demand curve of the industry. The price determination have
will be identical to that of the monopoly firm.
 The price determination and profit maximization can be shown as
following:-

MC

AC
R
Reve P
nue
& T
cost S

AR
MR

X
O Q
Output

In the above diagram equilibrium is attained at point E.

The price is OP and profits are indicated by the shaded
portion PRST.
(3) Price Leadership:

In this model one of the firms emerge as a leader and price

policy of this firm is followed by others. The leader is generally
the dominated firm of the largest firm. Sometimes a firm may be
a small one. But it may be able to understand the changes
required in the industry. This firm when it makes changes in its
price policy, it is followed by others. While the former one is
called as the dominant price leadership, the letter is called as the
barometric price leadership. In the case of dominant price
leadership, the firm allows all mother firms to sell the quantity
they want at the prevailing price. Then it enters into the markets
as the residual seller.
 The following diagram explains the case of dominant price leadership:-

Reve MC2
nue
& MCf
cost R
S
P T

D
L

M
R
L

O Q Q X
Q 1 2
Output
In the above diagram DM is the market demand curve for the product. MCL is the
marginal cost curve of the leader while MCf is the summation. Of marginal cost curves
of the follower firms.

They produce at the point where price = MCf. The dominant firm attains equilibrium at
point E where MC1 cuts MRL curve and MCL=MRL.

The price set by this firm is OP. At this price the followers will supply OQ1 amount of
the product and the leader will supply Q1Q2 of the output.
Though firms would like to form a collusive model, there are many practical problems.

Major ones are:-

(a) In many countries collusion is not allowed. For E.G. in USA it is illegal.

(b) By undercutting prices, firms may cheat each other. For e.g. for some customers they may
sell at a cheaper rate to enhance their market share.

(c) Due to expansion of international trade, competition is becoming intensive.

(d) Within a cartel, if some members hate each other, then it is very difficult to retain the
cartel.
Example of cartel:-

The best example of cartel is the Organization of Petroleum Exporting Countries.

(OPEC).

Production quotas and prices are set by OPEC. OPEC has twelve nations as members.
Though they agree to the provisions of the cartel, in reality they are not able to adhere
to it. Often squabbles among them had resulted in fluctuations in supply and price.
Some economists have pointed out the harmful effects of this market structure. They
are:

(a) Price under oligopoly is always higher than the long run average cost to ensure
higher profits.

(b) Oligopoly firms do not produce the optimum output.

(c) Price is greater than the long run marginal cost indicating under allocation of
resources to the firms.

(d) Firms incur a huge investment expenditure as they prefer a non-price

competition to a price competition.
Some economist argue in favor of oligopoly market structure.
Some of their arguments are:

(a) Many oligopoly firms invest a sustainable amount on research and development. This
accelerates technological development in the economy.

(b) Certain products like steel, automobiles and services like airline cannot be produced by
large number of sellers.

(c) It is not right to say that all types of advertisement expenditure is wasteful.
Thus oligopoly market has its own distinct merits and demerits. Like monopolist
competition, it is also widely prevalent in all modern economist.
 conclusion
We understood by this project that, there are many types of market structure like
monopoly, oligopoly, etc.

Oligopoly is a market structure, in which there are few sellers selling homogeneous and
few sellers selling differentiated products.

When seller sell homogeneous products then it is called as pure oligopoly and when they
sell differentiated products then it is called differentiated oligopoly.
 Bibliography
•Meaning of Oligopoly – F.Y.A.F. Micro
Economic Book.

•Features of Oligopoly – F.Y.A.F. Economic

Book
•Models of oligopoly – F.Y.A.F. Micro
Economic Book.
•Major Practical Problems – Economic Book
Author- Saraswathy Swamimathan.