oligopoly

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WHAT IS OLIGOPOLY?

• Oligopoly lies between perfect competition and monopoly

• Few number of companies on the market

• Produce identical products and compete on price, product, quantity and marketing

BARRIERS TO ENTRY

• Natural barriers to entry - when the market is not big enough for more firms

Example: Suppliers of milk in a small city; Local newspaper, etc.

NATURAL BARRIERS TO ENTRY

LEGAL BARRIERS TO ENTRY

• Occurs when a legal barrier protects a small number of companies

• Example: A city might license only two taxi companies even though the market is big enough for more

SMALL NUMBER OF FIRMS

• Small number of firms because of barriers

• Each has a large share of the market

• Companies are interdependent and can cooperate to have larger profits

INTERDEPENDENCE

• Each firms actions influence the other firms’ profits

• If one firm lowers its prices it gains more market share and the other companies loose profits.

• Profit depends on other companies actions.

COOPERATION

• A small number of companies in a market tend to cooperate

• They can form a cartel.

• A cartel is a group of firms acting together – colluding – to limit output, raise price and increase economic profit.

Cartels are illegal in EU and most of the countries.

OPEC is an example of international cartel

• Cartels are hard to maintain and even official cartels brake down

DUOPOLY

• Duopoly is a type of Oligopoly where only two firms copete on the market

• INTEL and AMD

• BOEING and AIRBUS

• Highly competative market

• The firms are able to influence the fortunes of each other

MODELS EXPLAINING OLIGOPOLY

KINKED DEMAND CURVE MODEL

• Based on the assumption that each firm believes that if it raises its price, others will not follow, but if it cuts its price, other firms will cut theirs

MODELS EXPLAINING OLIGOPOLY

DOMINANT FIRM MODEL

• The dominant firm – has a big cost advantage over the other firms and produces a large part of the industry output.

• The dominant firm sets the market price and the other firms are price takers

• Example: large petrol retailer

Thank you for your attention!