Oligopoly literally means a few sellers Each seller controls significant size of market Product/ service could be (1) differentiated/ (2) undifferentiated Eg:(1) Cars, TVs, paints; (2) Oil, Cement, Decisions of every seller in the market matters Interdependency of firms is key feature of oligopolistic industry
Main Features
It is in between the Monopoly and Monopolistic market models Every seller can exert significant influence on market Indeterminate demand curve; due to dependency on rivals reactions Buyers keenly compare the price/ distinct features of each sellers product
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Price will tend to be stable, even in the face of an increase in marginal cost.
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Introduced by Paul Sweezy, it deals with why prices of products like steel at $28 per ton during 1901-16; again at $43 between 1922-33; Sulphur prices remained at $18 per ton between 1926-38 excepting 2-3 cents variation/ ton in two years. Hints to draw Kinky DD Curve
AR has a kink at the prevailing price MR becomes discontinuous below the kink If MC passes through the Gap, holding priceoutput constant is the best alternative New industry, in early stages, this model is useful in shorter term.
Price Leadership
Dominant Firm Intels 386 cut chips price from $152 to $99 in 1992 (till 1991, it was monopoly), AMD had to follow it Barometric Price Leadership
Old, experienced & largest firm assumes the role of a leader; protects the interests of other sellers. Others costs of production is considered before fixing price
Collusive Oligopoly
The small number of firms can arrive at tacit or formal agreement about price/ output. Formal agreement is termed as a cartel Though some minor rivalry/ self interest still persists, under the cartel, group interest is given prime importance. In case of a conflict of interests between the two, self interest is ignored.
OPEC Cartel
Members of major oil producers (13, incl. Iraq) formed in 1960) In 1975, OPEC accounted for 55% of world oil output & 80% trade; now produces 30% of world output Determination of oil price (meets at Vienna twice a year normally), own & control oil resources directly Saudi Arabia is major player in the cartel They are now operating in a $22-28 per barrel price band, and vary output accordingly. Venezuela strike pushes up price/ US-Iraq conflict affects the price (Jan/ 03)
Effects of Oligopoly
Possibility of restricted output/ high prices Entry barriers make consumers pay higher price Firms will not be able to build/ operate at optimum levels of production Sales promotional strategies waste resources Neither liked by the players/ nor good for consumers/ government as less tax collection. Lower employment opportunities
Monopolistic Competition
It is a market which has many sellers producing goods which are close substitutes Products are similar but not identical. This means there is product differentiation-real ( physical) or perceived Collusion is unlikely as all players have limited control over market supply and price This market can be treated as a set of
Some Examples
Nearly 40-50 brands of toilet soaps in India About 20 Tooth pastes Number of convent schools in a city Organised textile industry Private Travel services (60-70) between two cities Manufacturers of pesticides Domestic publishers (25-30) for leading subjects of college texts/ guides/ note books
Price-Output Determination
Short run:For a typical firm Same as the monopoly equilibrium for profits/ losses (MC=MR, MC cuts MR from below) There is scope for making supernormal profits in short run In long run, the firms will be earning just normal profits, as some more firms can enter and output increases In long run, AR/MR are downward sloping and AR is tangential to AC.
Group Equilibrium
An assumption made here is that there is uniformity in costs and demand faced by various firms within a group. Individual firms decisions are negligible; no retaliation by others If a firm within a group develops a good that becomes popular, it enjoys huge profits in short run. Later, these are competed away and only normal profits result
Summary
Oligopoly and Monopolistic models are closer to reality Both are not extreme models like Monopoly and PC While entry is very difficult (but not impossible) in oligopoly, it is relatively easier in monopolistic competition. Efficiency is better in oligopoly than under monopolistic competition.