Download - Eco Project Oligopoly Group10
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OligopolyPrice and output under oligopoly
Group 10
WMP 2009-2012
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Key Issues
Meaning of oligopoly
Interdependence between producers
Examples of oligopoly
Concentration Ratio in Oligopoly
Price and non-price competition
The kinked demand curve
Price and output under conditions of oligopoly
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What is an Oligopoly?
Oligopoly is best defined by the market conduct
(behaviour) of firms
A market dominated by a few large firms I.e.
Competition amongst the few
High level ofmarket concentration
Concentration ratio is the market share of the
leading firms
Each firm tends to produce branded /
differentiated products
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What is an Oligopoly?
Entry barriers long run supernormal profits
Mutual interdependence between competingfirms (important)
Intensive non-price competition is common
Periodic aggressive price wars
Strong tendency for many market structures to
tend towards oligopoly in the long run Market consolidation
Exploitation of economies of scale
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To name a few examples of oligopolies
Electronic Comsumer Durables LG, Samsung, Videocon, Sony,Voltas etc
Brewers - UB brands (Kingfisher, Zingaro and Kalyani Black) have a 48% market share, SAB'sacquired brands (Haywards, Royal Challenge,Knock Out and Foster's) delivera combined market share of 37%, all
othersare limited to the remaining 15% Detergents HLL, Proctorand Gamble, Fena, Ghari Group, Karnataka
Soaps & Detergents, Nirma
Music retailing Saregama India Limited, TIPS Industries, Times Music
Banks SBI, HDFC, Citibank, ICICI
Entertainment Sony Pictures, Zee Telefilms, Cinevistas, BalajiTelefilms
Electrical retail NDPL, BSES,
Cement Manufacturing ACC, Grasim, Birla, UltraTech
Mobile phone networks Bharti Airtel, Reliance, Vodaphone, Idea,BSNL
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Concentration ratio & market share
Market forms can often be classified by their concentration ratio.Listed, in ascending firm size, they are:
Perfect competition, with a very low concentration ratio.
Monopolistic competition, below 40% for the four-firm
measurement.
Oligopoly, above 40% for the four-firm measurement.
Monopoly, with a near-100% four-firm measurement.
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Market Share in Telecom
G s ri r i r s lhi J
2
3
5
6
J n' 9
irtel
Vo afone
I ea
MTN
ircel
Whats the concentration
ratio of top 3?
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The Concentration Ratios
Steel Industry : 71% (Tata/ SW/SAIL/Ispat)
Cement Industry : 44% (ACC/Grasim/Ultratech/Birla)
Automobile Industry : 1% (Maruti,Hyundai,Tata, Honda)
Mobile Handset Industry : 0% ( okia/Samsung/Ericsson/LG)
Pizza Industry : % (Dominoes/PizzaHut/PizzaCorner)
uice Industry : 8 % (MinuteMaid/Tropicana/Onjus)
Multiplex Industry : 78% (BigCinemas, P R, FunCinemas, DT)
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Use of Price and Non-Price Tools
How Oligopolies compete apart from Price!
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PriceWars in Oligopolistic Markets
Price wars are concerned with raising or defending market share
Firms depart from short run profit maximization when they engage inprice wars but can return to this in the long run
They often happen after a period of relative price stability or whennew firms enter the market
Low cost airlines
ewsPaper Business
Petrol Retailing
Personal Computers
Broadband internet services Online holiday industry
Mobile Phone Companies
Banking Industry
Car and home insurance
Can you think of some
pricing strategies
that these businesses
tend to use?
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Why Firms Advertise? Game Theory
Ads
o Ads
Ads o Ads
00/ 00 0/100
100/ 0 0/ 0
Firm 1
Firm
ashEquilibrium,
where both
firms advt.
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LG and Samsung After Sales
In oligopoly market, After Sales is another tool for market
power!
LG Launches 11 initiative :
Call back in hours At site for repair in 1 day
Repair within 1 hour
Samsung : Speed, Smile and Sure
1 hour Response
1 day repair
Service with Smile and Surety!
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Brand Effects Petrol is not the same anymore!
IOL, HPCL and BPCL oligopoly in Retail Fuel. 004
changed the story
Retail Fuel opened to Private sector ( 00 )
Reliance opens multiple outlets ( 00 -04)
Uniform product, Little differentiation, no branding Easy
kill for Private players?
PSUs resorted to branding fuel, and launched a huge
marketing campaign
Starting of Loyalty Programmes (ClubHP, XtraRewards
etc)
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The Kinked Demand Curve
One model of price and output determination
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The Kinked Demand Curve
AR1
MR1
AR2
MR2
Rival firms assumed to follow a price cut(making demand relatively inelastic)
but
firms are assumed not follow a priceincrease (making demand relatively
elastic)
Assumes the main aim ofthe firm is to maintainmarket share
Price
Output
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Assume we start out at P1 and Q1:
Will a firm benefit from raising price above P1?
Will it benefit from cutting price below P1?
Deriving the Kinked Demand Curve
Price
Output
P1
Q1
AR1
MR1
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Assume we start out at P1 and Q1:
Will a firm benefit from raising price above P1?
Will it benefit from cutting price below P1?
Deriving the Kinked Demand Curve
Raising price above P1
Demand is relatively elastic
Firm loses market share and
some total revenue
Price
Output
P1
Q1
AR1
MR1
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Assume we start out at P1 and Q1:
Will a firm benefit from raising price above P1?
Will it benefit from cutting price below P1?
Deriving the Kinked Demand Curve
Raising price above P1
Demand is relatively elastic
Firm loses market share and
some total revenue
Reducing price below P1
Demand is relatively inelastic
Little gain in market share
other firms have followed suit
Total revenue may still fall
Price
Output
P1
Q1
AR1
MR1