Oligopoly

Nina Joy P. Dayao

Managerial Economics
MBA-1AR
Oligopoly

 It is a market structure in which a

market or industry is dominated by
a few number of sellers who likely
to be aware of the actions of the
others and can influence price or
quantity sold.
Car manufacturers
Top Car Top Car
Manufacturers in Manufacturers in
the Phils. all over the globe.
Petroleum Industry
Fast food Chain
Characteristics of Oligopoly Market Structure

 Few Firms/sellers

 Either homogenous or differentiated

products

 Difficult entry

 Distinguished feature :
interdependence
Characteristics of Oligopoly Market Structure

 High Cross Elasticity

 Competition

 Group Behavior

 Uncertainty

 Price Rigidity
Collusion in Oligopoly
 It is an agreement among firms to
divide the market, set prices, or limit
production.

 The firms can benefit at the expense

of the consumers by “agreeing” to
restrict output or equivalently, to
charge higher prices.
Two Kinds of Collusion
Oligopoly Model

 Cournot Model
1. There are two sellers.
2.Recognizes that there is
interdependence between firms.
3. Firms compete using non price
techniques
4. The simplest form of duopoly.
Oligopoly Model

 Sweezy Model

1. Prices remain sticky or flexible for a long

time even if the economic condition
change. The explanation is the kinked
demand curve hypothesis.
2. Best known model in explaining behavior
of oligopolistic firms.
Kinked Demand Curve
Elastic demand curve
increase in price, lose many customers
A
Price
D = AR
P1 B
Inelastic demand curve
decrease in price, gain few
customers

C
Q1
Quantity
The Equilibrium for an Oligopoly

 A Nash equilibrium is a situation in which

economic actors interacting with one
another each choose their best strategy
given the strategies that all the others have
chosen.
The Equilibrium for an Oligopoly

 When firms in an oligopoly individually

choose production to maximize profit, they
produce quantity of output greater than the
level produced by monopoly and less than
the level produced by competition.
 The oligopoly price is less than the
monopoly price but greater than the
competitive price (which equals marginal
cost).
Equilibrium for an Oligopoly

 Possible outcome if oligopoly firms pursue

their own self-interests:
• Joint output is greater than the monopoly quantity
but less than the competitive industry quantity.

• Market prices are lower than monopoly price but

greater than competitive price.

• Total profits are less than the monopoly profit.

How the Size of an Oligopoly Affects the Market
Outcome

 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 will
increase the amount sold, which will lower the
price and the profit per unit on all units sold.
How the Size of an Oligopoly Affects the Market
Outcome

 As the number of sellers in an oligopoly

grows larger, an oligopolistic market looks
more and more like a competitive market.
 The price approaches marginal cost, and
the quantity produced approaches the
socially efficient level.
There may be barriers to entry into the industry

 Firms may not be able to enter the

industry because of:
 Economies of scale
 Limit pricing
 Control over the channels of distribution
 Brand proliferation
Oligopoly
Barriers to Entry

1. Economies of Scale
 Large firms produce on a large scale and benefit
form decreased cost per unit .
 If a new firm tries to enter the market the existing
firm that is well established can afford to lower
price to deter them.
 New firms will be unable to compete due to the
huge set up costs involved.


Oligopoly

2. Limit Pricing

 Is an agreement between firms to set a

relatively low price to make it unprofitable
for new firms to enter the industry.
3. Control over the
channels of distribution

Oligopolies may refuse to supply retailers

who stock the products of competitors.
Oligopoly

4. Brand Proliferation

 The same firm produces several brands of

the same type of product.
 This will leave very little room for new firms
to competitor.
Oligopoly
When competing firms try to increase
sales/market share by methods other than
changing prices.
 Branding: To create loyalty and
recognition.
 Packaging: Distinctive to competitors.
 Competitive advertising: Creates
difference in the minds of consumers.
Oligopoly

 Opening hours: Extended working

hours.
 Quality of service: Layout, staff,
services.
 Sponsorship: Of local or national
events.
 Special offers: Gifts, coupons, loyalty
cards.
Benefits of non-price comp to consumers

1. Consumer loyalty rewarded

 Consumers can receive loyalty points which can be used
as they wish.
2. Stability in prices
 Consumers will be better able to budget as prices will not
always be changing.
3. Better quality commodities / services
 Firms may offer better service and/ or after sales service
to consumers.
4. More informed consumers
 Through advertising consumers may get more information
about products and services and so can make more
informed choices.
Benefits of price competition to
consumers

1. Lower prices
 Consumers will be able to get better value from
their limited income.
2. More choices
 Consumers will have a greater disposable
income and can decide what to spend it on.
 Price rigidity/Sticky prices

 Prices tend not to change when costs

change in oligopoly.
 Firms fear the reaction of their competitors.
 If a firm increase price their competitor will
not, so they will lose customers & revenue.
 If a firms decrease price so will competitors,
so they will not gain customers and lose
revenue.
Constant prices

 Firms in oligopoly may not increase prices

when costs increase as it may cost more to
change catalogues and price lists than
change the price.
 In this case the oligopolist will absorb the
price increase themselves.
 Thank you !

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