SYAZA ALIA BT MAD SININ o8DPI11F1030 NURUL NAZLEEN BT A.

RAHIM 08DPI11F1035 SITI NUR AINA BT NOHD SANI 08DPi11F1034

LECTURER NAME: PN AZLINI BINTI AWANG

7.4.1 Define on oligopoly market

-Explain the characteristics of an oligopoly market. -Rewrite the rationale for the existence of an oligopoly. - Rewrite the merits and demerits of an oligopoly market. -Compare characteristics of perfect competition,monopoly,monopolistic and oligopoly market.

y Oligopoly market contains only a few firms

that produce either identical or differentiated product. y The entry a new seller is difficult or imposible. y In this market the goods produce and sold are homegenous or diffrentiated.If only to firm exits it called a duopoly.

y Profits maximation conditions: An oligopoly maximizes profits by

producing where marginal revenue equal marginal costs. y Ability to set price:Oligopolies are price setters rather than price takers. y Entry and exits:Barriers to entry are high. The important barriers are economies of scale, patents, access to expensive and complex technology, and strategic actions by incumbent firms designed to discourage or destroy nascent firms.
y Number of firms: There are so few firms that the actions of one firm

can influence the actions of the other firms. y Long run profits: Oligopolies can retain long run abnormal profits. High barriers of entry prevent sideline firms from entering market to capture excess profits.

y Product differentiation: Product may be homogeneous (steel) or

differentiated (automobiles).
y Perfect knowledge: Assumptions about perfect knowledge vary but

the knowledge of various economic actors can be generally described as selective. Oligopolies have perfect knowledge of their own cost and demand functions but their inter-firm information may be incomplete. Buyers have only imperfect knowledge as to price,cost and product quality.
y Interdependence: The distinctive feature of an oligopoly is

interdependence.Oli gopolies are typically composed of a few large firms. Each firm is so large that its actions affect market conditions. Therefore the competing firms will be aware of a firm's market actions and will respond appropriately.

y Merits

Having only a limited number of companies controlling a large proportion of a particular industry reduces the likelihood of one of the members making unjustified price increases. Should such an increase not be adopted by the remaining companies, the first supplier will simply lose its share of the limited market, as consumers will turn to the other providers for the identical product at the lower rate. Although the profit margin of the other companies may be slightly smaller, they will, of course, benefit from the subsequent increase in demand.

y Demerits

In a normal market, it is supply and demand that mostly affect price. Should a consumer find a similar product offered by another provider at a cheaper price, he will make his purchase from that other provider. Suppliers will not, therefore, over-inflate their prices because they will simply lose customers. In an oligopoly, there is little choice for consumers and this will negate any influence they may have had over price control. By the very nature of an oligopoly, providers in an industry with limited members are able between them to dictate the price of their product, as consumers are unable to find alternatives or substitutes elsewhere. Since in many countries collusion or conspiracy between companies to inflate prices is illegal, members of an oligopoly may follow signals given by its industry leader as to any imminent changes it proposes to implement.

Characterstics

Perfect competition

Monopoly

Monopolistic competition

Oligopoly

Number of seller Type of product

Large Identical of homogenous Very easy None Wheat, corn

One Unique or no close substitution Imposible More Local phone services, electricity MR=MC Subnormal, supernormal or normal profits

Many differentiated

Few Homogenous or differentiated difficult Some Automobiles, cigarettes MR=MC Subnormal, supernormal or normal profits

Entry condition Control over price Examples

Easy Less Food,clothing

Profits maximization Short-run equilibrium

MR=MC Subnormal, supernormal or normal profits

MR=MC Subnormal, Supernormal or normal profits