Oligopoly

Oligopoly Market Characteristics

Few sellers.

Homogenous or unique products.

Blockaded entry and exit.

Imperfect dissemination of information.

Opportunity
equilibrium.

for

above-normal

(economic)

profits

in

long-run

Examples of Oligopoly

Carbonated Beverage Market (Pepsico & Coca Cola), Domestic aviation

Industry in India (Few Players like Air India, Jet airways, Indigo,
Spicejet).

In this form of market structure, the number of sellers is few such that a seller
can closely watch what his co-selller is doing in terms of his price & output
and take that into consideration while doing his own profit maximization
exercise.
For instance: Let P = a bQ be the market demand curve where the
market is supplied by two sellers 1 & 2. Then market demand can
be expressed as
P = a b (Q1+Q2). Now firm/seller 1 will define his profit function
as
= TR TC = PQ1 C1 = {a b(Q1+Q2)}Q1 C1 .
Thus now with oligopoly, a sellers profit function includes rivals
output Q2 as given, which was not the case in other forms of
market. Similarly it can also include P2 if sellers are competing
based on Prices and not on market share
This value of rivals output (Q2) is arrived at by a seller by looking
at how rival was selling in last period. He looks at the quantity or
price his rival was selling or charging in last period and assumes
(guesses or conjectures) that the rival will continue to do the same
in this period and based on this guess about Q2 or P2, he
incorporates these Q2 or P2 in his profit function and maximizes his
profit and determines his equilibrium quantity (Q1) to be sold and
price (P1) to be charged.

The seller does not, however, talk to his rival to understand exactly
what would be Q2 or P2 . This is the case of non-collusive oligopoly.
There are several models of non-collusive oligopoly depending on
different types of conjectures/guesses that a seller makes about his
rival
Non-Collusive Oligopoly Models

Cournot Duopoly Model when a seller makes a guess about his rivals
output behavior Ex: Coke and Pepsi

Bertrands Duopoly Model - when a seller makes a guess about his rivals
price behavior Ex: Times of India and Hindustan Times

Stackelbergs Duopoly Model when a seller is a market leader in the

sense he knows the demand and cost conditions of the market and also
knows that his rival will watch his behavior and take it into his decision
making. This normally happens when a seller is a first-mover in the
industry. Ex: Sony in gaming industry.

Sweezys Kinked demand curve Model- guess of a seller is if he raises

price no co-seller will follow him but if he lowers price all co-sellers will
follow

Limitation of Non-collusive Oligopoly

Non-collusive form of oligopoly gives rise to a lot of uncertainty. Because entire
profit maximization exercise of a seller is based on guess about rivals behavior.
If rivals behavior does follow what he guessed then his profit max exercise fails
to give the maximum profit.
To avoid such uncertainty sellers in oligopoly market often move towards
Collusive oligopoly by secretly colluding with co-sellers
Collusive Oligopoly

Cartels market sharing, joint profit maximization may be the objective of

the cartel

Mergers become one seller

Price Leadership either the dominant firm or the low cost firm will set the
price, others will follow it.
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