Oligopoly 151017115234 Lva1 App6892

OLIGOPOLY
Introduction:
An oligopoly is a market demanded by a few producers, each of which has control over
the market. It is an industry where there is a high level of market concentration. However
oligopoly is a best defined by the conduct of firms within a market rather than it’s market
structure.
Oligopoly:
An oligopoly is a situation where a few firms, with or without differentiated
products dominates the market. The reason for the small number of companies is the
extremely high cost of entering the industry. Because there are a few firms, there is little
incentive to compete based on price.
The Nature of Oligopoly: A Markets form where there are only a few firms in the industry but
there are many buyers."
- Producers
- Buyers
- Products
- Mutual Interdependence
- Price
- Competition
- Relationship between firms
- Economic Scale
Oligopolistic Market:
As a market characterized by a small number of producers who often act together to

control the supply of a particular good and its market price. e.g Motor van, Isfat, Elumenium,
Medicine, Electronic equipment, computer equipment etc.
Characteristics:
 Few sellers offering similar or identical products

 Interdependent firms
 Best off cooperating and acting like a monopolist by producing a small quantity of output
and charging a price above marginal cost.
The Kinked Demand Curve:
An oligopolist who believes she will lose a substantial number of sales if she
reduces output and increases her price but will gain only a few additional sales if
she increases output and lowers his price, away from the tacit collusion outcome,
faces a kinked demand curve.
It illustrates how tacit collusion can make an oligopolist unresponsive to changes
in marginal cost within a certain range when those changes are unique to her.
The oligopolist also believes that if

she lowers her output and raises his
price her rivals will refuse to
reciprocate and will steal a
substantial number of her customers,
leading to a large fall in sales. So her
demand curve is very flat to the left
of Q*. The kink in the demand curve
leads to the break XY in the marginal
revenue curve.
Figure: The Kinked Demand Curve.
COMPARISON:
Oligopoly Monopoly Perfect Competition Monopolistic Competition

Innovative/ creative Expand to much Undifferentiated productAdvertise and introduce
consumer to spend more.
Few firms Experience Consumers has No control in price
diseconomy of scale limited product
Greater efficiency Increase in Ac Boring Consumers suffer more
No competition, No
innovation
Advantages:
Since there is few numbers of firms of producing a given product, they are competition
and competition into production of quality products and services.
 There is also a high degree of collusion which results into combined efforts to
produce better services.
 There is availability of information is a little bit easy in terms of costs as
compared to a monopoly market structure the level of advertisement is high and
persuasive, this provides information to consumers, suppliers retailers etc at
easily.
 In such an industry there is easier entry and exit which is quiet better than that of
monopoly which is blocked.
 The nature of products and services produced appear to be differentiated in such a
way they create variety, this could due to branding and change of shape though
the product remains the same.
 lastly but not the list there major goal is profit maximization they easily reach this
goal low
Disadvantages:
1. Freedom of entry is restricted.
2. Consumer can’t control this market.
3. Sometimes consumer pays more money for the oligopoly’s product.
4. those who enter the oligopoly he must be millionaire.
Size of an Oligopoly and Market Outcome:
1. How increasing the number of sellers affects the price and quantity:
• The output effect: Because price is above marginal cost, selling more at the going
price raises profits.
• The price effect: Raising production lowers the price and the profit per unit on
all units sold.
2. As the number of sellers in an oligopoly grows larger . . .

• The market looks more and more like a competitive market.
• The price approaches marginal cost.
• The quantity produced approaches the socially efficient level.
Oligopoly in Practice:
The Legal Framework-
Oligopolies operate under legal restrictions in the form of antitrust policy. But many
succeed in achieving tacit collusion.
Tacit collusion is limited by a number of factors, including
 large numbers of firms,
 complex pricing, and
 conflicts of interest among firms.
Why People Sometimes Cooperate
 Firms in oligopolies have a strong incentive to collude in order to reduce production,

raise prices, and increase profits.
 Firms that care about future profits will cooperate in repeated games rather than
cheating in a single game to achieve a one-time gain.
Conclusion:
An oligopoly may end up looking more like a monopoly or a competitive market,

depending on the number of firms. There is no certainty in how firms will compete in
Oligopoly; it depends upon the objectives of the firms, the contestability of the market
and the nature of the product.

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OLIGOPOLY

As a market characterized by a small number of producers who often act together to

 Few sellers offering similar or identical products

The oligopolist also believes that if

Figure: The Kinked Demand Curve.

Oligopoly Monopoly Perfect Competition Monopolistic Competition

Size of an Oligopoly and Market Outcome:

2. As the number of sellers in an oligopoly grows larger . . .

Why People Sometimes Cooperate

 Firms in oligopolies have a strong incentive to collude in order to reduce production,

An oligopoly may end up looking more like a monopoly or a competitive market,

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