1. PRICE DETERMINED
UNDER OLIGOPOLY
1 By: Rajat Sharma
12BSP1941
Sec:B
2. The Term “Oligopoly” has been derived from two Greek
words.
„Oligi‟ which means few and „Polien‟ means sellers.
It is a competition among few big sellers each one of them
selling either homogenous or differentiated products.
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3. WHAT ARE SOME EXAMPLES OF
OLIGOPOLY?
Automobiles
Steel
Telecom service providers
Internet service providers
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5. WHAT CONCENTRATION RATIO
CONSTITUTES AN OLIGOPOLY?
There is no magic number, but if a
large percentage of the sales are from
the 4 largest firms, it‟s an Oligopoly
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6. WHAT IS AN EXAMPLE OF A HIGH
CONCENTRATION RATIO?
Out of 151 firms in the aircraft
industry the leading 4 constitutes 79%
of total sales
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7. CHARACTERISTICS OF
OLIGOPOLY
Few Sellers
Homogeneous or Differentiated Product
Interdependence :
Importance of Advertising and Selling costs
Price Rigidity
Restriction to Entry
Ability to set price
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8. HOW PRICES ARE DETERMINED?
Interdependent Pricing
Price wars
Price Leadership
Formal Agreement : Cartel
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9. 1. INTERDEPENDENT PRICING
Each firm in an oligopolistic industry keeps a close
eye on the activities of other firms in the industry.
Because oligopolistic firms engage in competition
among the few, decisions made by one firm
invariably affect others.
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10. 2. PRICE WARS
Some economists assume that an oligopolistic is able to
predict the counter moves of his rivals, and they provide
a determinant solution to the price and output problem.
The objectives of price wars :
i. To seize the major part of the total sales
ii. To expand the monopoly power after victory
iii. To threaten the rivals so that they accept its leadership.
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11. 3. PRICE LEADERSHIP
Another approach is that the firms in an Oligopoly would
accept one firm as a leader and would follow him in
setting prices. Such a leader firm may be dominant or
low-cost firm producing a very large proportion of the
total production and having a great influence over the
market.
The form of price leadership:
i. Leadership of dominant firm
ii. Barometric price leadership
iii. Exploitative or Aggressive leadership
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12. 4. FORMAL AGREEMENT : CARTEL
A group of firms that collude to limit competition in a
market by negotiating and accepting agreed-upon
price and market shares.
Two models of imperfect cartels:
i. Joint-Profit Maximizing Cartels
ii. Market-sharing cartels
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13. KINKED DEMAND CURVE MODEL
According to the kinked demand curve hypothesis, the
demand curve facing the Oligopolistic has a „Kink‟ at the
level of the prevailing price. The kink is formed at the
prevailing price level because the segment of the demand
curve above the prevailing price level is highly elastic
and the segment of the demand curve below the price
level is inelastic.
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15. £ KINKED DEMAND FOR A FIRM UNDER OLIGOPOLY
Current price
and quantity
give one point
on demand curve
P1
fig
O Q1 Q
16. STABLE PRICE UNDER CONDITIONS OF A
£
KINKED DEMAND CURVE
MC2
P1 MC1
a
D AR
b
O Q1 Q
MR
17. KINKED DEMAND CURVE THEORY
If the firm lowers its price below OP1, its rivals will
follow.
Its demand will expand along the relatively inelastic
section of the demand curve below OP1
and total revenue will fall.
18. KINKED DEMAND CURVE THEORY
If the firm raises its price above OP1, none of its
competitors will follow.
Its demand for prices above OP1 will contract along
the relatively elastic section of the demand curve
and total revenue will fall.
19. As a result of action and non-reaction to price
changes, an oligopolist is faced with a kinked
demand curve at OP1.
Price rigidity is due to the kinked demand curve and
the resulting discontinuity in the MR curve.
20. UNIQUE ABOUT OLIGOPOLY
What is unique about firms in oligopolies is that
they tend not to raise or lower prices, because at
higher prices demand is elastic and at lower prices
demand is inelastic – raising or lowering prices
would result in revenue losses. As a result, MC can
increase or decrease without affecting the profit-
maximizing price and output level.
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21. In the bottom diagram, we see that a rise in marginal costs will not necessarily
lead to higher prices providing that the new MC curve (MC2) cuts the MR curve
at the same output. The kinked demand curve theory suggests that there will be
price stickiness in these markets and that firms will rely more on non-price
competition to boost sales, revenue and profits.
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