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19975364 Eco Ppt Oligopoly

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    The Term Oligopoly has been derived from two Greek

    words.

    Oligi which means few and Polien means sellers.

    Thus Oligopoly is an abridged version of monopolistic

    competition . It is a competition among few big sellerseach one of them selling either homogenous or

    hydrogenous products.

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    Feller defines Oligopoly as Competition among

    the few.

    In an Oligopolistic market the firms may be

    producing either homogenous products or maybe having differentiation in a given line of

    production.

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    Oligopoly refers to a market situation where there r a

    few sellers (2 to 10) in a market, selling homogenous

    or differentiated products. Oligopoly is oftendescribed as Competition among few.

    When the products of a few sellers are homogenous it isknown as Pure Oligopoly When the products of few

    sellers are differentiated , but close substitutes of each

    other it is known as Differentiated Oligopoly .

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    1. Few SellersFew Sellers::An oligopoly market is characterized by a fewsellers and their number is limited . (usually not more than 10)

    Oligopoly is a special type of imperfect market. It has a largenumber of buyers but a few sellers.

    2. Homogeneous or Differentiated ProductHomogeneous or Differentiated Product: The

    Oligopolists produce either homogenous or differentiatedproducts. Products may be differentiated by way of design ,trademark or service

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    3. InterdependenceInterdependence: The most important feature of theOligopoly is the interdependence in decision making of the

    few firms which comprise the industry.

    The reactions of the rival firms may be difficult to guess. Hence

    price is indeterminate under Oligopoly.

    4. High Cross ElasticitiesHigh Cross Elasticities: The cross elasticity of demand forthe products of oligopoly firms is very high. Hence there is

    always the fear of retaliation by rivals.Each firm is conscious about the possible action and reaction of

    competitors while making any change in price or output

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    5.5. Importance of Advertising and Selling costsImportance of Advertising and Selling costs::Adirect effect of interdependence of the Oligopolistic firms is

    that they have to employ various aggressive and defensivemarketing weapons to gain greater share in the market or to

    maintain their share.

    Hence, the firms will have to incur a good deal of costs on

    advertising and other measures or sales promotion .

    Firms in Oligopoly market avoid price cutting and try to

    compete on non-price basis. This is because if they start

    under-cutting one another, a type of price war will emergewhich will drive a few of them out of the market as the

    customers will try to buy from the seller who is selling at the

    cheapest price.

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    6. CompetitionCompetition:: Competition is unique in an oligopolymarket. It is a constant struggle against rivals.

    7.. Different sizeDifferent size: The size of firm in an oligopolymarket. It is a constant struggle against rivals.

    8. Group BehaviourGroup Behaviour: Each Oligopolist closelywatches the business behaviour of other Oligopolists

    in the industry and designs his moves on the basis of

    some assumptions of their behaviour .

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    9. UncertaintyUncertainty:: The interdependence of other firmsfor ones own decision creates an atmosphere of

    uncertainty about price and output

    10. Price RigidityPrice Rigidity:: In an oligopoly market each firmsticks to its own price to avoid a possible price war.

    The price remains rigid because of constant fear of

    retaliation from rivals.

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    11. Indeterminate or Kinked Demand CurveIndeterminate or Kinked Demand Curve:: Theinterdependence of firms and the inability of a

    particular firm to predict the behavior of other firmsmake the demand curve of an Oligopolistic firm

    indefinite and indeterminate.

    The demand curve of an oligopolist loses its definitenessand determinates and goes on constantly shifting as the

    rivals change their prices in responds to the prices

    change made by the firm . According to Paul Sweezy,firms in an oligopoly market have a kinky demand curve

    for their products.

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    Because of interdependence , an oligopolistic firm cannot assume

    that its rival firms will keep their quantities constant when

    it makes changes in price or quantity. When an oligopolistic

    firm changes its prices, its rival firms would retaliate andchange their prices which in turn would affect the demand of

    the former firm.

    Oligopoly can be classified into several forms. Some of the

    important forms of Oligopoly are as follows

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    1. Perfect and Imperfect OligopoliesPerfect and Imperfect Oligopolies: If the

    product of the rival firm are homogenous then it isPerfect Oligopoly, if the product are differentiated

    it is Imperfect Oligopoly.

    2. Open and Closed OligopoliesOpen and Closed Oligopolies: If entry is opento new firms it is termed as Open Oligopoly, and if

    entry is strictly restricted it is termed as Closed

    Oligopoly.

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    3. Collusive OligopolyCollusive Oligopoly: If the firms under oligopolymarket combine together instead of competing it is

    known as Collusive Oligopoly. The collusive may

    take place in the form of a common agreement or an

    understanding between the firms.

    4. Partial andFull OligopolyPartial andFull Oligopoly: Partial oligopoly isformed when the dominant firm which is the price

    leader and all other firms follow the price of theprice leader. If no firm acts as a price leader then it

    is calledFull Oligopoly.

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    Because of interdependence , an oligopolistic firm cannot assumethat its rival firms will keep their quantities constant whenit makes changes in price or quantity. When an oligopolisticfirm changes its prices, its rival firms would retaliate andchange their prices which in turn would affect the demand ofthe former firm.

    Economists have established a number of price-output modelsfor Oligopoly market, depending upon the behaviour patternof the members of the group. A few important ones are asfollows :

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    1. Avoidance of InterdependenceAvoidance of Interdependence: Some economistshave assumed that oligopolist firms ignore

    interdependence . When interdependence disappearsfrom decision making the demand curve facing theoligopolist becomes determinate.

    2. Price LeadershipPrice Leadership:Another approach is that thefirms in an Oligopoly would accept one firm as aleader and would follow him in setting prices. Such a

    leader firm may be dominant or low-cost firmproducing a very large proportion of the totalproduction and having a great influence over themarket.

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    3. Price WarsPrice Wars: Some economists assume thatan oligopolist is able to predict the countermoves of his rivals, and they provide adeterminant solution to the price and outputproblem.

    4. Game TheoryGame Theory: In the theory of games, theoligopolistic firms does not guess at its rivals

    reaction pattern, but calculates the optional movesby rival firms. It calculates their best possiblestrategies and in view of that adopts its policiesand counter moves.

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    5. NonNon--price competitionprice competition: Since the oligopolists face thedanger of retaliation in price cut competition, they resort to

    non-price competition. This can take the from ofadvertising, sales promotion , improvement of the productetc.

    6. Secret Price ConcessionsSecret Price Concessions: Since an open price cut isretaliated by rivals, some oligopolists offer secret priceconcessions for selected buyers.

    From the above analysis it is clear that there is no singledeterminant solution to the price output fixation underOligopoly. The fixing of price under oligopoly marketsituation is very difficult.

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    In many oligopolistic industries, prices remain sticky or

    inflexible for a long time even though the economic

    conditions change. Many explanations have been

    given for this price rigidity under Oligopoly and the

    most population explanation is the Kinked DemandCurve Hypothesis given by an American economist

    Paul Sweezy.

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    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 atthe prevailing price level because the segment of the

    demand curve above the prevailing price level is

    highly elastic and the segment of the demand curvebelow the price level is inelastic.

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    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 curvedD is relatively elastic and the lower segment kD is relatively

    inelastic.

    The differences in elasticity's is due to the particular

    competitive reaction pattern assumed by kinked demand

    curve hypothesis. The assumed pattern is Each Oligopolist

    believes that if he lowers the price below the prevailing level,his competitors will follow him and accordingly lower their

    prices, whereas if he raises the price above the prevailing

    level, his competitors will not follow his increase in price

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    A } Price ReductionPrice Reduction: If an oligopolist reduces theprice below the prevailing price to increase sales, the

    competitors will fear that their customers would go

    away from them and buy from the firm which has

    made a price cut. Therefore, in order to retain its

    customers, they will also lower the prices. Besides thecompetitors quickly follow the price reduction by an

    oligopolist, he will gain only very little sales.

    Thus the segment kD of the demand curve which his

    below the prevailing price OP is inelastic showing

    that very little increase in sales is obtained

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    B } Price IncreasePrice Increase: If an oligopolist raise the priceabove the prevailing price level, there will be a

    substantial reduction in sales. as a result of price rise,

    its customers will withdraw from it and go to its

    competitors who welcome new customers will gain in

    sales. The oligopolist who raises its price will lose agreat deal and therefore, refrain from increasing price.

    The segment dK of the demand curve which lies abovethe current price level OP is elastic following a large

    fall in sales if a producer raises his price.

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    Each oligopolist will find himself in such a situation

    that on one hand, he expects rivals to match his price

    cuts very quickly and on the other hand, he does notexpect his rivals to match his price increase .

    Given this expected competitive pattern, each oligopolistwill have a kinked demand curve dD, with the upper

    segment dK being relatively elastic and the lower

    segment kD being relatively inelastic

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    C } Price RigidityPrice Rigidity: An oligopolist facing a kinked

    demand curve will have no incentive to raise its priceor lower it. The Oligopolist will not gain any larger

    share of the market by reducing his price below the

    prevailing level. There will be a substantial reduction

    in sales if he increasing the price above the prevailing

    level. Each Oligopolist will adhere to the prevailing

    price seeing no gain in changing it.

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    The prevailing price is OP at which a kink is found in

    the demand curve dD . The price OP will remainstable or rigid as every Oligopoly firm will find no

    gain to lower it or increase it. Thus rigid or sticky

    prices are explained according to the kinked demandcurve theory.

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    1. The oligopoly model provides a theoretical explanation asto why stable prices exist in oligopolistic industries. But ittakes prevailing prices as given and provides nojustification as to why that price level rather than someother is the prevailing price

    i.e. the kinked demand model can be viewed as incomplete.

    2. Stigler had tested the kinked demand curve empirically onseveral oligopolies. He found that oligopolistic rivals arejust as likely to follow price increase as price decreasesindicating little support for the kinked demand curve.

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    3. The kinked demand Oligopoly theory does not applyto oligopoly cases of price leadership and price cartels.

    4. In case of pure oligopoly, the kinked demand curvedoes not provide adequate explanation for price

    rigidity.

    5. The explanation of price stability by Sweezys kinkeddemand curve theory applies to depression periods. In

    periods of boom and inflation, when the demand forthe products increase, price is likely to rise ratherthan remain stable.

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