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Oligopoly
Oligopoly is a situation where a few large firms
compete against each other and there is an element
of interdependence in the decision-making of these
firms.
It is a competition among FEW BIG SELLERS
each one of them selling either homogenous or
differentiate products.
Examples- Automobiles, Steel, Internet service
providers
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Features
A few sellers Lack of uniformity
Homogenous or Differentiated Product
Advertisement Elements of Monopoly
Constant Struggle
Interdependence
Existence of the Price Rigidity
Uncertainty
Existence of Non-Profit Motive
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Reasons for the Emergence Of Oligopoly
1. Large Capital
2. Patent Rights
3. Essential Factors
4. Economies of Scale
5. Entrepreneurship
6. Mergers
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OLIGOPOLY MODELS
The CournotsDuopoly Model
Sweezy Kinked-Demand Theory Model
Price Leadership Model
Collusive Pricing Model
The Game Theory Model
Prisoners Dilemma Model
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CournotsDuopoly
It is a market with two sellers exercising
control over the supply of commodities.
There are 2 firms
Both operate at zero cost
Both face demand curve with constant
negative slope
Each acts that the other will not react to his
decision to change output or price
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Price Leadership Model
Low cost firm price Leadership
Dominant firm price leadership
Barometric price leadership
A large dominant firm with lower costs that it
competitors becomes the price maker.
The dominant firm sets price and its quantity
based upon residual demand and this determines
the price for competitive firms and their supply.
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The Game Theory
We have knowledge of the players, the likelystrategies & related payoffs
Each game tries to attain Nash equilibrium.
A Nash equilibrium in prices; a set of pricessuch that no firm can obtain a higher profit
by choosing a different price if the other
firms continue to charge these prices. There may be more than one Nash
equilibrium
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Kinked Demand Curve Model
Show a situation where the best situation forplayers is to maintain current prices and that prices
remain stable in spite of firms with different cost
structures. Asymmetry in price movements:
o If firm raises price, no one follows, therefore
quantity demanded is elastic.
o If firm lowers price, all follow suit so the
quantity demanded is quite inelastic.
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Marginal revenue curve is discontinuous and
allows for various marginal cost curves.
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Kinked Demand Curve
If the firm raises its
price above P, it facesan elastic demandcurve, payoff low
If the firm lowers itsprice below P, it faces
an inelastic demandcurve, payoff low
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Kinked Demand Curve
Different firms can havedifferent MCs. As longas they fall with in thediscontinuous MR, P willremain stable.
Output Effect < PriceEffect for pricemovements with thediscontinuous MRcurve.
If MCincreases enough,all firms raise theirprices and the kinkvanishes.
Oli l M d l C ll i
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Oligopoly Models Collusive
Pricing
Collusive pricing model reveals that firms in the
market agree on production limits and set a
common price to maximize the joint profit..
When firms collude and agree on common price
so mostly they earn Economic profit.
It is assumed here that firms have identical cost
data and same demand and thus Marginal revenue
data.
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CartelsA cartelis an organization of
independent firms whose purpose is
to control and limit production andmaintain or increase prices andprofits.
Like collusion, cartels are illegal in theUnited States.
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Conditions necessary for a cartel to be
stable (maintainable):
There are few firms in the industry.
There are significant barriers to entry.
An identical product is produced.
There are few opportunities to keepactions secret.
There are no legal barriers to sharing
agreements.
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Unique About Oligopoly
What is unique about firms inoligopolies is that they tend not to
raise or lower prices, because at
higher prices demand is elastic and atlower prices demand is inelastic-
raising or lowering prices would result
in revenue losses. As a result, mc canincrease or decrease without affecting
the profit- maximizing price and output
level.
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Thank You