2. Less Price Is Always
Wise
Mithilesh
C mpetition
lig poly
• Pricing
• Cooperative vs. Non-cooperative Behaviour
• Game Theory
• Cournot’s Model
• Kinked Demand Curve

3. A market in which a two-three
large sellers control most of
the production of a good or
service and they work together
on setting prices
ligopoly
S e l l e r s A r e R u l e r s

4. Conditions of an Oligopoly
a. Very few Sellers that control the entire market
b. Products may be differentiated or identical (but they are usually standardized)
c. Medium barriers to entry: Difficult to Enter the market because the competitors work
together to control all the resources & prices
d. The actions of one affects all the producers
e. Collusion = an agreement to act together or behave in a cooperative manner
More Competition Less Competition

5. BARRIERS
Structural Barriers
• High capital cost
• Economies of scale
• Product differentiation and brand loyalty
• High switching cost
• Ownership/control of key factors or outlets
Institutional Barriers
• Patents
• Regulations
Strategic Barriers
• Limit pricing
• Excess capacity
• Vertical integration
• Sleeping patents
• Predatory pricing
• Tying sales

6. Oligopoly Curve

7. Pricing (administered) In Oligopoly
• Rigid oligopoly prices, often referred to as “administered” prices
• Administered prices have generally been defined as those prices arrived at within the firm as an
integral part of its decision-making process, as distinguished from those generated entirely by
the impersonal interplay of market forces. Nearly all prices communicated to the public through
published price lists are administered.
• But the oligopolistic prices contributing to the postwar inflation have been relatively few,
confined principally to highly concentrated industries that deal with strong labor unions.

8. Cooperative vs. Non-cooperative Behaviour In Oligopoly
The basic dilemma
• CO-OPERATIVE BEHAVIOUR: - in oligopoly is a situation when firms jointly decide the prices and output and
maximizes their joint profit. This situation is called collusion, in this situation it becomes profitable for one firm if it
defects and cuts the prices and rises output,
• NON- COOPERATIVE BEHAVIOUR: - is a situation when they do not co-operate and decides their prices and output
separately and compete with each other. When firms in oligopoly do not co-operate it is called non- cooperative
equilibrium or Nash equilibrium
In oligopoly the basic dilemma the firms face is whether to co-
operate or to compete. If they co-operate profit will be maximum
and if they do not profit for all will decrease
Dilemma

9. Oligopoly Pricing Through Game Strategic Behaviour
• Strategic behavior is the behavior that occurs when what is best for A depends upon what B does, and what is best for B
depends upon what A does
• Strategic behavior has been analyzed using the mathematical techniques of game theory
• Game theory provides a description of oligopolistic behavior as a series of strategic moves and countermoves
GAME THEORY: -
It is a mathematical theory that is used for the analysis and resolution of conflict situations in which
parties have opposing interests. The concepts of game theory provide a tool for formulating, analyzing and understanding different
strategies. It attempts to address the functional relationship between the selected strategies of individual players and their market
outcome, which may be either profit or loss.

10. For each company the possibility of playing either with a high or a low price is available, while the demand for the
product of a company depends not only on its chosen strategy, but also on the strategy chosen by the opponent. A change
in demand will lead to changes in profits. If a company increases the price, and the other retains a lower price, then the
first company loses a part of the profits, because it loses part of its market, whereas another company increases its market
share and profits.

11. Oligopoly Pricing Under Specific Assumption
Cournot’s Model
 Cournot competition is one where firms simultaneously choose their optimal quantity produced instead of
prices. The manner in which we derive a solution is through examining what the best strategy each has given
their believes in what their competition would do.
The assumptions for Model:
1. There are two firms (though the problem can be generalized to the
multiple firm Case)
2. Firms produce a homogenous product.
3. Firms choose optimal quantity produced simultaneously.
4. Marginal Cost of production are the same for both firms.

12. Kinked Demand Curve and Price Leadership model

13. Examples
Airline IndustryCar Industry

14. Thank
You